If there’s one simple investment maxim that will improve your odds of success in any market climate, it’s this: Keep your costs down.
This can be especially important with mutual funds and exchange-traded funds, as researcher Morningstar affirmed in a newly released study. The company found that funds of either type that buy and hold preselected baskets of stocks or bonds, as grouped in indexes, usually beat those managed by professionals trying to pick winners. The main reason: Index funds are cheaper to run, with cost savings passed on to investors.
Index funds are those that hold groupings of stocks such as the 500 companies in the Standard & Poor’s 500 index. There are many other indexes, including those focused on bonds, foreign stocks and real estate companies.
This isn’t a new finding: Research by Morningstar and others has supported the idea that passive index funds are a good way to invest. Morningstar describes these funds as “passive” because there’s no ongoing efforts to tweak or alter their portfolios, as opposed to “active” funds run by managers who try to pick future outperformers or make other adjustments. The study analyzed the performance of more than 9,000 funds.
You might think active managers could better react to economic and other developments, but that doesn’t seem to improve their results.
“Elections, executive orders, tariffs and geopolitical risks made for a roller-coaster ride during the 12 months through June 2025,” wrote Bryan Armour, a Morningstar director who co-authored the study. “Conventional wisdom says active managers should better manage those complexities, but performance says otherwise.”
The study offers insights on how you should invest your money. For example, if you participate in an employer-sponsored 401(k) program, you probably have a choice of at least a dozen funds in which to invest, and possibly other options like shares of individual stocks. Placing index funds at the center of your portfolio can be wise, especially if you’re investing for the long haul.
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Morningstar found that just 33% of actively run mutual funds and exchange-traded funds beat similar types of passive index funds over the 12 months through June 2025 and survived through that period. That’s down from 47% over the prior year and marks one of the largest drops since Morningstar has been conducting this research. Some funds fold from time to time, which is why Morningstar tracked only the ones that survived over the full 12 months.
