Passive vs Active Investing: Which Strategy Works Best in 2025?
The debate between passive and active investing is intensifying as markets stabilise. Here’s how both strategies are performing in 2025 — and what type of investor each suits best.
In 2025, the long-standing debate between passive and active investing continues. With markets showing moderate growth and volatility easing, investors are reassessing whether index tracking or hands-on management delivers better results.
The State of the Market
Following the turbulence of 2022–2023, global markets have returned to steadier growth. The FTSE 100 is up 6 percent year-to-date, and the S&P 500 has gained 9 percent as inflation cools. However, returns vary significantly across sectors.
Against this backdrop, both passive and active funds have found new relevance.
Understanding the Two Approaches
- Passive investing involves tracking a market index, such as the FTSE 100 or S&P 500, through exchange-traded funds (ETFs) or index funds. The goal is to match market performance at a low cost.
- Active investing relies on fund managers or individual investors making buy-and-sell decisions to outperform benchmarks.
Performance Comparison in 2025
According to Morningstar data, 61 percent of UK active equity funds underperformed their benchmark over the past five years. Yet, in certain categories — such as small caps, energy, and emerging markets — active managers have delivered meaningful outperformance.
Average returns (2020–2025):
| Category | Passive Funds | Active Funds |
|---|---|---|
| UK Large Cap | 6.2% | 6.5% |
| Global Equity | 7.4% | 7.1% |
| Emerging Markets | 4.3% | 5.6% |
| UK Small Cap | 5.8% | 6.9% |
Active funds shine in niche markets, while passive funds dominate broad-based exposure.
Cost and Accessibility
One of passive investing’s strongest advantages remains cost. Average expense ratios for UK ETFs are around 0.15 percent, compared to 0.85 percent for actively managed funds.
For long-term investors, lower costs compound into substantial savings. Over 20 years, a £10,000 investment growing at 6 percent annually would be worth £32,000 with passive fees, versus £28,000 under typical active fees.
Risk and Behaviour
Passive strategies reduce decision fatigue and emotional trading, but they mirror market downturns. Active investors have the flexibility to adjust allocations during volatility, though this depends heavily on timing and skill.
Research from Vanguard’s 2025 UK Investor Report found that behavioural mistakes — such as panic selling — cost the average active investor 1.5 percent in annual returns.
Which Strategy Works Best in 2025?
It depends on goals and temperament:
- Passive investing suits those seeking steady, market-matching returns with minimal oversight.
- Active investing suits experienced investors or funds targeting specific opportunities.
Hybrid portfolios — combining index trackers for core holdings and selective active funds for diversification — are increasingly popular.
Example Hybrid Allocation
| Asset Class | Allocation | Strategy |
|---|---|---|
| Global Equity Index | 50% | Passive |
| UK Small Cap Fund | 20% | Active |
| Bonds (Global Aggregate) | 20% | Passive |
| Thematic Fund (AI, Energy) | 10% | Active |
The Bottom Line
In 2025, neither strategy is universally superior. Passive investing remains cost-effective and reliable, while active strategies can enhance returns in specific sectors. The best approach is often a balanced one — combining efficiency with targeted opportunity.
References:
- Morningstar UK – Fund Performance Report 2025
- Vanguard – UK Investor Behaviour Report 2025
- Financial Times – Passive Investing Trends 2025
- JP Morgan Asset Management – Global Market Outlook 2025
