In a significant shift, investors withdrew $1 trillion from active equity mutual funds throughout 2025, driven by growing frustration over inadequate stock selection and a market that favored a narrow group of tech giants. While the S&P 500 achieved new record highs, these gains were largely attributed to a select few leading companies, compelling investors to reconsider their strategies.
The year saw a consistent outflow of cash from active strategies, with data from Bloomberg Intelligence indicating this marked the 11th consecutive year of net withdrawals, and the most substantial within this ongoing cycle. In contrast, passive equity exchange-traded funds (ETFs) attracted over $600 billion, highlighting a stark preference among investors for lower-fee options that closely track the market.
Investors did not pull their funds hastily; rather, they monitored performance closely. Many had paid management fees for portfolios that diverged from index benchmarks but ultimately saw those differences fail to yield better returns. Dave Mazza, CEO of Roundhill Investments, articulated the dilemma for active managers, stating, “The concentration makes it harder for active managers to do well.” Without significant exposure to the so-called “Magnificent Seven” tech stocks, active fund managers faced the risk of underperformance.
Despite expectations that skillful stock picking would thrive, the reality proved challenging. Market breadth remained weak, with data from BNY Investments showing that less than 20% of stocks rallied in tandem with the market during many days in the first half of the year. This prolonged period of narrow market action revealed that diversified investments often lagged behind concentrated bets on large-cap technology stocks.
The data further illustrated that 73% of equity mutual funds in the U.S. underperformed their benchmarks in 2025, according to Bloomberg Intelligence. This marked one of the poorest performances since 2007, exacerbated by the fading of April”s tariff scare and the surge in excitement surrounding artificial intelligence that solidified tech”s leadership.
Some funds did manage to outperform, albeit with varying degrees of risk. The $14 billion International Small Cap Value Portfolio from Dimensional Fund Advisors, for example, outperformed both its benchmark and the Nasdaq 100, returning just over 50%. This portfolio minimized exposure to U.S. large-cap stocks and instead focused on a diverse array of approximately 1,800 stocks, primarily in sectors such as financials, industrials, and materials.
Joel Schneider, deputy head of portfolio management for North America at Dimensional Fund Advisors, remarked on the challenges of global diversification, stating, “This year provides a really good lesson. Everyone knows that global diversification makes sense, but it”s really hard to stay disciplined and actually maintain that.”
Margie Patel from the Allspring Diversified Capital Builder Fund also noted her fund”s 20% return, bolstered by strategic investments in firms like Micron Technology and Advanced Micro Devices. Patel criticized the tendency for many funds to act as “closet indexers,” emphasizing that the standout stocks are likely to remain at the forefront.
As discussions around a potential market bubble intensified, with the Nasdaq 100 trading at valuations above 30 times earnings and close to six times sales, analysts like Dan Ives from Wedbush Securities expressed optimism. Ives, who launched an AI-focused ETF that attracted nearly $1 billion in 2025, noted that while volatility is part of the landscape, he believes the current tech bull market has the potential to extend for another two years.
In contrast, the VanEck Global Resources Fund achieved nearly a 40% gain, driven by robust demand in energy, agriculture, and metals, while leveraging expertise from geologists and analysts. Shawn Reynolds, who has managed this fund for 15 years, highlighted how active management enables significant thematic investments.
As the investment landscape continues to evolve, the trend of moving away from traditional active management strategies could lead to broader implications for both institutional and retail investors.
