Passive Crushes Active...But HopeSprings Eternal

I have written before about the report by S+P which consistently shows the performance of actively managed funds to fail to beat their relevant indices.

A similar report is produced by Morningstar and shows similarly that performance of active funds is inferior to passive funds. The longer the time frame for evaluation with a sample that includes by definition only funds that survive shows particularly poor performance. Since the study includes all passive funds --many of which carry higher fees than the ETFs in the same categories --one would expect performance of the funds vs.ETFs would show even worse performance for the active funds.

This report compares passive funds to their actively managed peers in the same asset class.

Among the key findings:

In 2018 only 36% of active funds outperformed passive...down from 46% in 2017.
Over 10 years that number drops to only 24%,

Across all the equity sectors studied only two showed outperformance for active funds over 10 Years. Emerging markets (54.5%) and foreign small mid blend (70.6%). The latter category likely included a limited number of passive funds. Among domestic stock funds the "best" record was for US Small Cap Value at 33.3%. outperformance vs passive over 10 years/  US Large Cap Blend --the category where the most money is invested and the largest number of funds --showed only 10.9%.

In sum. the evidence shows that investors are far better off with passive rather than active funds particularly when measured against the most important benchmark-- long term performance.

But hope for active funds springs eternal. The WSJ reports on the growth of actively managed ETFS
moving active management to a new wrapper.

Market Turbulence Spurs Demand for Fledgling Active ETFs

Passive funds still dominate industry, but a flurry of interest in active segment hints investors’ perceptions are shifting

....ETF managers who handpick stocks and bonds drew a record $27.5 billion in new investor cash last year, while inflows into index-tracking ETFs slowed for the first time since 2013, according to Morningstar. So-called strategic beta funds, a hybrid between active and passive management, likewise had a banner year, garnering $74 billion.

 These funds may have lower management fees than active funds but still higher than passive ETFS. They carry their own complications.Since they must disclose their holdings each day they run the risk of making public their strategies and holdings thus reducing what is seen as their comparative advantage. Funds run the risk of traders and others taking advantage of this information for short term profits.Additionally it is quite possible that these funds will run into the complication encountered with closed end mutual funds and to a lesser extent with passive ETFS; The fund and may trade at a premium or a discount to the actual holdings in the fund, It would be difficult for the market makers to consistently be able to deliver a portfolio matching fund holdings that unlike a passive fund would frequently, Several fund companies are petitioning the SEC to have active etfs without daily disclosure,

Judging by the record of actively managed mutual funds including last year's volatile markets it would be hard to give much credence to the claims expressed in the article :

But the rise of ETFs has also coincided with a decade long bull market that has left most stock pickers in the dust. Less than one quarter of U.S. active funds beat their index-tracking peers in the past decade, according to Morningstar. Investors fled.

Now the prospect of more turbulent markets has investors reconsidering their commitment to plain-vanilla indexing, Mr. Rosenbluth said. Active ETFs are especially appealing because, while more expensive than passive ETFs, they can be significantly cheaper than actively managed mutual funds, he added.

The logic here is puzzling 2017 markets (in which investors pulled money from equity ETFs was volatile and active funds performed poorly 

In what can only be seen as a case of hope springs eternal the article notes:

Now the prospect of more turbulent markets has investors reconsidering their commitment to plain-vanilla indexing, 

As can be seen by the Morningstar report particularly the long term data which include periods of low and high volatility it seems unlikely investors switching to active management in ETFs will fare any better than active mutual fund investors.