Active vs Passive in 2025: Who’s Winning?

Active investing is about picking stocks, hoping to beat the market. Passive investing is simpler, just own the market cheaply and hold steady. Active investors seek higher returns, while passive investors aim for efficiency.

 

Fees matter. A lot.

Active funds typically charge around 0.66% per year. Index funds and ETFs usually cost about 0.05%. That’s more than half a percent disadvantage right out of the gate.

Then there’s the tax issue. Active funds trade often, generating unexpected tax bills.

Morningstar research shows active funds typically cost investors around 1.2% per year in taxes, compared to only 0.3% or less for index funds or ETFs.

Combine fees and taxes, and you’re down around 1% to 1.5% annually before performance even enters the equation.

 

Direct Indexing: A Better Way

That’s where direct indexing can help.

Direct indexing involves owning individual stocks that mimic an index. You can sell specific losing stocks, harvest the tax losses, and buy similar stocks to stay aligned with the index.

Goldman Sachs research from 2023 indicates that direct indexing strategies can increase after-tax returns by approximately 1.00% to 1.35% per year through systematic tax-loss harvesting.

Morningstar’s 2024 research confirms this. They found direct indexing added about 1.1% annually in after-tax returns compared to traditional market ETFs over a ten-year period.

Direct indexing isn’t guessing the market. It’s systematic, disciplined, and designed to enhance returns through more effective tax planning.

 

Your Investing Options Simplified

Active funds typically underperform, incur higher costs, and generate more taxes.

Passive indexing is a low-cost and reliable option, but it doesn’t offer much flexibility with taxes.

Direct indexing combines the best of both worlds: market-like returns plus smart tax-loss harvesting to potentially outperform after taxes.

 

The Bottom Line

Investing can already feel tough enough. There’s no reason to make it harder by paying extra fees and taxes, hoping to beat the market.

For high-income investors, real returns often come from smarter tax strategies, not from stock picking.

If you’re still holding expensive active funds or old-school mutual funds in a taxable account, you’re probably losing returns each year without realizing it.

Thankfully, that’s something we can fix.

 

Sources

• S&P Dow Jones Indices, SPIVA U.S. Year-End 2024 Scorecard
• JPMorgan Asset Management, Morningstar mid-year data (June 2025)
• Morningstar, Tax Cost Ratio Report (2024)
• Goldman Sachs, Direct Indexing Whitepaper (2023)

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