Time has not exactly been kind to active funds over the long haul.

Just a third of actively managed mutual funds and ETFs beat their passive counterparts over a year, according to a new Morningstar report. And believe it or not, that’s about as good as it gets, with the data finding that under 6% of active large blend funds beat index funds over 10 years, and under 3% of large growth funds outperformed passives. Stretch that out to 20 years, and the figures are 7% and less than 1%, respectively. However, short-term figures for active management were better for some categories of foreign stocks and intermediate core bonds. And investors’ odds of picking winners in fixed income were considerably better in the long term than for equities.

“There is value in investing a small portion of your portfolio in an actively managed ETF,” said Alvin Carlos, managing partner of District Capital Management, citing low fees and histories of outperformance. “It’s easier to find good active ETFs for bonds. You can find a good one with a 0.10% fee. It’s harder for stocks. The active stock ETF we may recommend to certain clients has a 0.59% expense ratio.” Morningstar’s data showed that over a year, nearly 52% of active intermediate core bond funds did better than passive ones on an asset-weighted basis. Corporate bond funds are an entirely different story, with a scant 4% of active ones beating passives.

The Price Is Right … Right?

As it turns out, costs do matter when it comes to active management, and having low fees is linked to higher odds of investors beating benchmarks over time, Morningstar found. That hasn’t been lost on investors, who on average “have chosen active funds wisely,” the report noted. Over 10 years, a dollar invested in active funds has, on average, beaten active funds as a whole, implying that “investors favor cheaper, higher-quality strategies,” the authors wrote.

Still, the odds are stacked against active:

• In the past 10 years, through June, 27% of actively managed funds that were in the lowest quintile by cost beat peers, while that was the case for just 15% of funds in the most expensive quintile, according to Morningstar.
• For US large-cap mutual funds and ETFs, there was a performance penalty that was higher for picking underperforming strategies than over choosing winners, the authors said. However, the benefits of choosing outperforming real estate and high-yield bond managers were greater than the costs of selecting low performers.

Actively Recruiting: The findings come as managers and assets have been flocking from active mutual funds to ETFs (both passive and active) and as the number of actively managed ETFs on the market is growing wildly. In the first half of the year, nearly 300 new active ETFs launched in the US, per Morningstar. Getting advisors on board with strategies that, on average, are unlikely to beat the market is a challenge. “I don’t see any value in actively managed funds, given their higher expense ratios and frequent underperformance relative to passive investment products,” said Kevin Feig, founder of Walk You to Wealth. “The vast majority of them don’t outperform passively managed funds, and those that do rarely achieve the same feat over multiple years.”

Life is good for the crypto industry under the new SEC leadership.

The agency last week gave a green light to so-called liquid staking, potentially paving the way for staking by some ETFs. In staff comments, the Securities and Exchange Commission made clear that under certain sets of conditions, the use of liquid staking does not make something a security, meaning that the vehicle would not fall under the agency’s oversight. That’s welcome news for spot-price crypto exchange- traded products that are registered under the Securities Act of 1933 rather than the Investment Company Act of 1940. The use of staking — whereby digital asset owners lend some of their crypto holdings to be used in a network’s consensus mechanism — is a benefit to owning Ethereum, Solana and other currencies. Asset owners are rewarded for their lending by receiving additional currency. Numerous crypto ETPs are waiting for the SEC to approve the use of staking within their products, but to date, very few have been successful.

SEC Chairman Paul Akins and Commissioner Hester Peirce praised the development, which the former called: “a significant step forward in clarifying the staff’s view about crypto asset activities that do not fall within the SEC’s jurisdiction.” Atkins credited the comments to the SEC’s recently announced Project Crypto, which he said “is already producing results for the American people.”

Assumptions All the Way Down

The lone Democrat commissioner, Caroline Crenshaw, cautioned that the staff comments may apply in few, if any, cases, as the statement “stacks factual assumption on top of factual assumption on top of factual assumption” and may not represent how liquid staking actually occurs. “The legal conclusions in the statement are circumscribed by the staff’s plentiful assumptions about liquid staking,” she said in a statement. “For those entities whose liquid staking programs deviate in any respect from the soaring wall of factual assumptions erected in the liquid staking statement, the message should be clear: Caveat liquid staker.”

Liquid staking solves a problem in crypto networks that use proof-of-stake validation:

• Staking has liquidity constraints, as un-staking assets in order to transfer them can take days or weeks.
• Liquid staking provides asset owners with tokens that can be used to transfer assets, making transactions faster and easier.

What’s at Stake: However, former SEC Chair Gary Gensler’s chief of staff and senior counsel, Amanda Fischer, who is now policy director at Better Markets, raised red flags. Assets can be restaked numerous times, with the generation of new tokens resembling leverage on derivatives, harkening back to the subprime mortgage crisis, Fischer said in a post on X. “It will exacerbate risks in the crypto market, especially when this ‘liquid staked’ crypto is put into ETF wrappers.”

After a shaky start to 2025, risk is back on the menu.

Investor appetite for it has returned from a post-Liberation Day lull, with thematic, high-volatility and leveraged funds seeing increased interest as investors adapt to uncertainty about the economic impact of varied US tariffs. One of the more popular risk-on ETFs is Cathie Wood’s ARK fund, which takes highly concentrated bets on individual stocks and saw a major drawdown in 2022 but has since rebounded, soaring 30% so far this year. As hedged strategies like buffer ETFs grow in popularity, risk-taking tactics will also continue to evolve. “Whatever was going on with the tariff situation, I think people have kind of accepted it,” said Dan Sotiroff, a senior research analyst at Morningstar. “The risk appetite right now is high.”

Risk-On, Risk-Off

Funds that tap specific segments of the market, like a large- or small-cap value index, are common among investing risk-takers. While those funds have exposure to high-volatility meme stocks, they’re also diversified enough to protect against the downsides of that volatility, Sotiroff said. Taking on specific sectors, such as tech (in funds like Invesco’s QQQ), materials and energy, can also be risky, with even more potential for losses associated with subsectors like semiconductors.

Charles Champagne, head of ETF strategy at AllianzIM, said he sees vehicles like inverse ETFs and leveraged ETFs as trading tools. Other higher-risk funds that may be worth a look offer concentrated exposure into particular markets, including:

• Roundhill’s Daily 2X Long Magnificent Seven ETF (MAGX), which doubles the daily exposure of the Magnificent Seven, comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
• State Street’s Energy Select Sector SPDR Fund (XLE), which aims to represent the energy sector within the S&P 500.
• Cathie Wood’s ARK Innovation ETF (ARKK), which invests primarily in AI-focused companies.

Still, overall investor risk tolerance may be lower than in decades past. “You see a lot more investors moving in towards these hedged vehicles,” Champagne said. “They still remember the bad years of 2022 and even the Great Financial Crisis. I think it’s still very top of mind.”

A Risk Too Far: To be sure, there’s a fine line between worthwhile bets and flying too close to the sun. The biggest mistake investors can make is chasing past performance, Sotiroff said. “You see a certain theme or sector ETF that does really well over the trailing year [and] the money piles in, but by that point, all the expectations are already baked in,” he said. “I suspect there’s some of that going on now.”