After 15 years of passive dominance, the market setup suggests a shift may be coming.

The case against active management seems as airtight as ever. Only 33% of active funds survived and outperformed their passive counterparts over the past year, according to Morningstar. Over ten years, that number drops to around 20%. In U.S. large-cap stocks—the market everyone watches most closely—just 7% of active managers beat passive alternatives. [i]

If you’ve been an active investor, it’s tempting to look at these numbers and want to switch to indexing. But the story is more nuanced than the headlines suggest.

What the Headlines Miss

Here’s what those discouraging statistics don’t tell you: They’re mostly about one corner of the market.

It’s true, U.S. large-cap equities have been extraordinarily difficult terrain for active managers. When the S&P 500’s top ten holdings represent 40% of the entire index[ii] – concentration we haven’t seen since the dot-com era – passive strategies have a built-in advantage. Active managers, constrained by risk limits, cash levels, and position sizes, simply can’t match that level of concentration in a handful of mega-cap technology stocks.

But when you zoom out to the rest of the investment world, the picture looks very different. Active managers in foreign markets have shown much better success rates. In small and mid-cap U.S. stocks, where there’s less analyst coverage and more inefficiency, active managers have had more room to add value. In bonds, active strategies have consistently delivered better results than their passive counterparts, especially during periods of market stress.[iii]

The debate around active versus passive has focused on the one area where passive has had its greatest success, but any discussion needs to incorporate the broader investment landscape where active management performs reasonably well.

Not All Indexes Are Created Equal

Even within passive investing, the details matter more than most people realize. Consider two U.S. midcap indexes. In 2025 year-to-date, the Vanguard Mid-Cap Index has gained about 12%, while the S&P 400 Mid-Cap Index has gained around 6%.[iv]

The difference comes down to index construction. The Standard and Poor’s approach excludes companies that have four consecutive quarters of negative earnings. Vanguard’s index, following a different methodology, includes larger and unprofitable companies. In a year when large stocks have dominated and unprofitable companies rallied hard, the high-quality screen became a performance drag. In other years, when markets favor quality and profitability, S&P’s approach has looked smarter.

The broader point is that there’s no such thing as purely passive investing. Every index makes active decisions about what to include, how to weight it, and when to rebalance. Those decisions have real consequences for returns.

Markets Move in Cycles

There’s also a pattern worth noting. Active and passive management have traded leadership over time.[v] The current cycle of passive dominance began in 2011 and has persisted for most of the past 15 years, with only a brief exception in 2015. Mega-cap technology companies have essentially become the market, and cap-weighted indexes have captured that concentrated run beautifully.

But from 2000 to 2009, active large-cap managers outperformed in nine out of ten years. Before that, in the late 1990s, during the tech bubble buildup, passive funds dominated as a handful of stocks drove all the returns. When the dot-com bubble burst, market concentration fell and active managers took the lead for the next decade. Whether that pattern repeats is uncertain, but the current backdrop at least creates the potential for a shift.

Here’s what concerns us about where we are now: Throughout 2025, companies with negative earnings have been outperforming profitable ones by the widest margins in years. Roughly 42% of Russell 2000 companies are unprofitable, yet they’ve been among the strongest performers since Liberation Day, when President Trump announced his sweeping tariffs on United States imports.[vi] These conditions usually occur when the economy emerges from a recession, not in a five-year-old expansion as we’re currently in, or when the market is recovering from a major downturn, not following two back-to-back years of double-digit returns. More importantly, they don’t last indefinitely. Both quality and valuation tend to revert to the mean over time, and when that happens, the ability to be selective becomes valuable again.