Index vs Active After Tax: What the 2025 SPIVA Data Shows
SPIVA mid-year 2025 and Morningstar year-end data show active underperformance. After-tax in a taxable account, the gap widens further.
The 2025 SPIVA mid-year scorecard from S&P Dow Jones Indices showed 54 percent of US large-cap active funds underperforming the S&P 500 at the first-half mark. That is the best half-year for active management since 2022. Advocates treated the number as vindication. Critics pointed to the longer window, where underperformance approaches 90 percent.
Both camps are looking at the same pre-tax data. In our view, the more consequential question for a taxable-account investor is what happens to the comparison after tax. Active funds generate higher taxable distributions because of their higher turnover. Index funds, especially ETF structures, distribute far less. The after-tax gap is larger than the pre-tax gap, and it is the gap that actually matters for a retail investor’s spending power.
This piece summarizes the 2025 pre-tax scorecard, walks the tax-cost math, and runs an illustrative 10-year taxable-account comparison. It is educational. Specific fund selection and tax situations vary; this is not a fund recommendation.
The pre-tax scorecard
SPIVA mid-year 2025 reported underperformance rates against each fund’s relevant benchmark:
- Large-cap: 54 percent of active funds underperformed the S&P 500 at H1 2025 (SPIVA mid-year 2025)
- Mid-cap: 25 percent underperformance at mid-year
- Small-cap: 22 percent underperformance at mid-year
- Fixed income: 68 percent underperformance across the aggregate, worse than equity average
The short-window numbers are the best story active management has told in three years. The long-window numbers do not cooperate. Advisor Perspectives’s SPIVA commentary summarizing the full-year 2025 data found:
- 5-year window: 86.9 percent of US large-cap active funds underperformed
- 20-year window: 91 percent underperformed
- 60/40 active portfolios: 96.9 percent underperformed a weighted passive benchmark over the year-end S&P special analysis
The Morningstar Active/Passive Barometer, summarized by CNBC in February 2026, found 38 percent of active funds beat their passive peers in 2025, down from 42 percent in 2024. Over the 10-year window, 21 percent of active funds survived and beat passive. The Morningstar data is directionally consistent with SPIVA but uses a different benchmark construction (fee-weighted passive blend rather than a single index).
Both datasets point the same direction. Active wins in isolated windows. Long windows favor passive by wide margins.
Why pre-tax misses the point for taxable accounts
A taxable brokerage account is where tax efficiency compounds. Inside an IRA or 401(k), capital gains distributions generate no current tax and the pre-tax vs after-tax comparison collapses into a pure expense-ratio comparison. Inside a taxable account, the fund’s turnover shows up on the shareholder’s Form 1099-DIV and is taxed every year.
The Morningstar analysis of fund tax costs documents the pattern. Average actively managed US equity mutual fund tax-cost ratios run meaningfully higher than index equivalents. Index mutual funds already outperform on tax cost because of low turnover. Index ETFs compress the gap further because the in-kind creation/redemption mechanism avoids realized capital gains at the fund level.
The headline fee differential is not the whole story. A 0.57 percent expense ratio on an active US equity fund versus 0.05 percent on a passive index (Morningstar fund fees data) is a 0.52 percent gap. The tax-cost gap typically doubles or triples that.
Turnover, distributions, and the tax drag
Active funds generate taxable distributions through two channels: ordinary dividends from underlying securities (which both active and passive do) and capital gains distributions from portfolio turnover (where active typically turns over 50-100 percent of the portfolio annually, generating realized short-term and long-term gains that pass through to shareholders).
The short-term gains are taxed at ordinary income rates. Long-term gains are taxed at 15 or 20 percent federally for most investors, plus 3.8 percent Net Investment Income Tax at higher incomes. In taxable brokerage, every December distribution arrives as an unavoidable tax event, even for investors who did not sell shares.
Index funds, especially broad-market ETFs, run turnover of 2-10 percent per year. Distributions are dominated by dividends. Capital gains distributions are rare and, in many passive ETFs, effectively zero.
Morningstar’s tax-cost ratio measures the annual return drag from taxation. Broad-market passive ETFs commonly run tax-cost ratios of 0.2-0.4 percent. Average active US large-cap mutual funds commonly run 1.0-1.5 percent. Some high-turnover active funds exceed 2.0 percent tax cost.
A 10-year taxable-account illustration
Assume $100,000 invested at the start of year 1, held for 10 years in a taxable brokerage account. Federal marginal bracket 30 percent (a 24 percent federal rate plus state tax on distributions, as a proxy). Pre-tax market return 7 percent annually for both funds, matching their benchmarks.
Passive broad-market index ETF assumptions:
- Expense ratio: 0.05 percent
- Tax-cost ratio: 0.30 percent (Morningstar benchmark for broad-market passive)
- Annual net return: 7.00 - 0.05 - 0.30 = 6.65 percent
Active US large-cap mutual fund assumptions:
- Expense ratio: 0.57 percent (Morningstar 2025 average active MF)
- Tax-cost ratio: 1.20 percent (Morningstar benchmark for average active large-cap)
- Annual net return: 7.00 - 0.57 - 1.20 = 5.23 percent
Terminal value after 10 years:
$$ \text{Passive} = $100{,}000 \times (1 + 0.0665)^{10} = $100{,}000 \times 1.9038 = $190{,}379 $$
$$ \text{Active} = $100{,}000 \times (1 + 0.0523)^{10} = $100{,}000 \times 1.6651 = $166{,}511 $$
The after-tax gap over 10 years on $100,000 is approximately $23,868. At 20 years, the same annual spread compounds the gap to roughly $77,000. At 30 years, roughly $190,000. The compounding asymmetry is the reason tax efficiency is a more consequential factor than most retail investors assume.
These figures are illustrative. Real fund selection changes the result. Some active funds have below-average tax cost ratios. Tax-managed active funds specifically target this problem. Some passive funds have higher-than-typical tax cost. The point is the structural tax efficiency difference, not a specific fund recommendation. The Morningstar tax-efficient fund guide lists specific funds that optimize for this dimension.
The long window does not forgive active
The 2025 SPIVA year-end “Heroes in Haystacks” special analysis examined the persistence of active manager skill. The finding: very few managers persisted in the top quartile across consecutive 5-year windows. The distribution of outcomes looked random, which is what a null hypothesis of no skill would predict.
The Morningstar 10-year survival-and-outperformance rate of 21 percent is arithmetic evidence of the same. Of active US equity funds active a decade ago, four in five have either been closed/merged or have underperformed their passive peer. A retail investor selecting an active fund at random had a ~20 percent chance of ending the decade ahead of the passive alternative.
These base rates do not prove active cannot work for anyone. They indicate the odds a retail selector without deep manager-diligence infrastructure faces.
When active might still win
The counter-case to “always passive” has three legitimate chapters.
Lowest-cost quintile active. Morningstar’s data shows 31 percent of the lowest-cost active funds beat their passive peers over the 10-year window ending 2025, compared to 17 percent in the highest-cost quintile. Expense ratio is a large part of the active underperformance story. Lower-cost active funds with experienced managers produce better odds.
Specific asset classes. Small-cap and mid-cap active funds underperformed at 22 and 25 percent rates at SPIVA mid-year, meaningfully better than large-cap. Inefficient markets (small-cap, certain international, some bond sectors) historically offer more active alpha opportunity. The underperformance at the 10-year window still exists but is narrower.
Tax-managed active funds. Some active fund managers explicitly optimize for tax efficiency by harvesting losses, avoiding high-turnover strategies, and timing distributions. These funds narrow the tax-cost gap and can make active economics closer to passive on an after-tax basis.
None of these cases break the base rate. They just describe corners where the odds are better than average.
Where asset location changes the answer
Asset location is the practice of holding different asset types in different account types to minimize aggregate tax drag. A standard rule: hold tax-inefficient assets (active funds, taxable bonds, REITs) inside tax-deferred accounts (IRA, 401(k), TSP). Hold tax-efficient assets (passive equity ETFs, municipal bonds) inside taxable brokerage.
Inside an IRA or 401(k), the tax-cost ratio goes to zero. The active vs passive comparison reduces to expense ratio alone. The 0.52 percent fee gap is still a material long-run cost, but the compounding is not magnified by annual tax drag.
For investors with a mix of account types, the practical takeaway: if a preferred active fund makes sense in the overall plan, it tends to make more sense inside a tax-advantaged account. Passive equity and municipal bonds tend to make more sense in taxable brokerage.
What to read next
Related FC coverage on fund selection and tax efficiency: index funds vs actively managed funds overview, tax-loss harvesting mechanics, and what is asset allocation.
For the primary data, the S&P Dow Jones SPIVA portal posts scorecards semi-annually, and Morningstar’s Active/Passive Barometer publishes the annual survival-and-outperformance analysis.
Ferrante Capital LLC is a registered investment adviser. Information presented is for educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. All investing involves risk, including the possible loss of principal.
FC and its principals may hold positions in securities or asset classes discussed in this article. This analysis is for educational purposes only and does not constitute a recommendation to buy, sell, or hold any security.
Forward-looking statements reflect Ferrante Capital’s current analysis and involve assumptions and estimates. Actual results may differ materially. Past performance is not indicative of future results.
Please consult a qualified financial professional before making investment decisions.
