S&P 500 vs. Active Funds: 2024 Is an Even Better Year to Buy the Index

According to data from Morningstar Direct, only 18.2% of actively managed funds whose primary benchmark is the S&P 500 managed to outperform the index during the first half of this year.

That could be worse than last year, when just 19.8% of actively managed funds beat the S&P 500.

Of course, some years are better for fund managers than others. In 2022, when the Federal Reserve launched its most aggressive rate-hike cycle in decades and sent the S&P 500 into a tailspin, 63.3% of active funds outperformed. In 2014, only 14.2% did so.

Over the past 10 years, the average share of active funds that beat the S&P 500 was 27%, suggesting that 2024 will be a particularly weak year.

Morningstar Direct data also shows that 13.4% of passive funds have outperformed the S&P 500 year-to-date. And over the past decade, passive funds have consistently lagged active funds in the share of funds that beat the S&P 500.

But that’s not surprising given that many passive funds seek only to keep pace with the index and keep expenses lower rather than charging higher fees and hoping for bigger returns.

Granted, the vast majority of the S&P 500’s recent gains have come from a handful of tech giants. That leaves investors in the index vulnerable to a selloff in a stock like Nvidia. Yet even as Nvidia has pulled well back from its highs in recent weeks, the index has continued to hit new records as other stocks have climbed.

At the same time, separate data showed the S&P 500 has beaten three out of four exchange-traded funds over the past year, the worst performance for ETFs since at least 2010.

Additionally, funds that are diversified across asset classes and geographies have also underperformed the S&P 500. These portfolios have lagged the index in 13 of the past 15 years, according to Cambria Funds data cited by Bloomberg. Other data showed that of the 370 asset allocation funds tracked by Morningstar, only one has beaten the index since 2009.

“In a low-volatility, high-return environment like 2024, investors should stick to the basics: buy simple index funds and active mutual funds with a proven track record of creating alpha,” Evercore strategist Julian Emanuel told Bloomberg last month. “No need to complicate the strategy. Simplicity is beautiful.”