An incredible 89% of all actively managed U.S. stock funds failed to beat the S&P 1500 Index during the past 10 years, according to the latest SPIVA U.S. Scorecard released earlier this month. And that’s just scratching the surface because the same stunning numbers of outperformance of indexes over fund managers held true in other equity and bond categories, too. 

In the over-crowded space of active U.S. large-cap stock funds, 89% were unable to beat the S&P 500 during the past decade (2009-19). The SPIVA report said, “Their consistency in failing to outperform when the Fed was on hold (2010-2015), raising interest rates (2015-2018), and cutting rates (2019) deserves special note, with 89% of large-cap funds underperforming the S&P 500 over the past decade.”

What does all of this underperformance mean? If actively managed funds were a song, they’d probably be the Duke Ellington’s jazz standard “"I Got It Bad (And That Ain't Good).”

The formerly mentioned S&P 1500 is tracked by the SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM). The underlying index consists of the same stocks within the S&P 500, S&P Mid Cap 400 and S&P Small Cap 600. Some of the popular ETFs linked to these three indexes include tickers VOO, MDY, and IJR. The S&P 1500 competes with other broad U.S. equity benchmarks like the Russell 3000, which is maintained by FTSE Russell.

Both financial advisors and their clients have taken notice by pouring more money into index-linked ETFs.

Passive U.S. equity funds, which rely on indexes instead of money managers to choose securities, gathered $162.8 billion in inflows last year. Moreover, passive funds ended 2019 with more market share by assets (51.2%) versus their active counterparts. Meanwhile, active U.S. equity funds experienced $41.4 billion in outflows in 2019, the sixth year of net outflows during the decade-long bull market, according to Morningstar.

The sharp outperformance by bond and stock indexes examined in the SPIVA study was apparent in all time frames, including one-, three-, 10- and 15-year periods. Nevertheless, there were some performance anomalies. 

For example, 90% of active mid-cap growth funds beat the S&P Mid Cap 400 Growth Index during a one-year period from 2018 to 2019. Likewise, 86% of active small-cap growth funds outperformed the S&P Small Cap 600 Growth Index. But these short-term bursts of outperformance didn’t last, as roughly 51% of active U.S. mid-cap and nearly 68% of small-cap growth funds underperformed corresponding S&P stock indexes from 2014 through 2019.

The same prevailing dominant results among indexes in the equity market were also experienced in the bond market.

The dominance of bond indexes during the past 10 years was most prominent in long-term U.S. government bonds and emerging markets. According to the SPIVA numbers, 100% of actively managed emerging-market bond funds failed to beat the Barclays Capital Emerging Markets Index, whereas close to 99% of active funds failed to beat the Barclays Capital Long Government Bond Index. 

Elsewhere, indexes topped more than half of active managers in all but two out of 14 bond categories during the past decade. And over 15 years, indexes outperformed more than half of active managers in all 14 bond categories.

While there will always be a tiny minority of active funds that outperform their peer index, identifying these funds before they actually outperform is akin to trying to pick tomorrow’s winning lottery numbers. 

The SPIVA U.S. Scorecard compares the performance of stock and equity indexes against active managers across 36 peer group categories. The report is published semi-annually by S&P Dow Jones Indices. Most of the indexes used for comparison are S&P-branded yardsticks, while a few of the bond benchmarks linked to U.S. government and corporate debt use Barclays indexes.

Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of “Habits Of The Investing Greats.”