73% of U.S. equity mutual funds underperformed their benchmarks, frustrating fund holders.
Investors spent 2025 pulling money, not adding it. Roughly $1 trillion left active equity mutual funds as frustration built around weak stock selection and a market that refused to reward diversity.
The S&P 500 kept hitting records, but the gains came from the same tight group of seven American tech giants. Owning anything else meant falling behind, and investors noticed.
Fund managers who aimed for balance faced a brutal setup. A portfolio packed with many sectors looked sensible on paper, but the market only cared about megacap tech. That gap tested patience, specifically due to how wide it became between those winners and everything else, year after year.
As the year moved on, cash flowed out steadily.Estimates from Bloomberg Intelligence using ICI data show about $1 trillion pulled from active equity mutual funds.
That marked the 11th straight year of net outflows and the deepest of the cycle. Passive equity exchange-traded funds moved the other way and took in more than $600 billion.
Investors didn’t rush for the exits all at once. They watched performance. Many paid fees for portfolios that looked different from the index. When those differences failed to pay off, patience ran out.
Dave Mazza, chief executive officer of Roundhill Investments, said the setup worked against active managers. “The concentration makes it harder for active managers to do well,” Mazza said. “If you do not benchmark weight the Magnificent Seven, then you’re likely taking risk of underperformance.”
Some market watchers expected stock picking to shine.Instead, the cost of straying from the benchmark stayed high all year.Market breadth stayed weak.
On many days in the first half, fewer than 20% of stocks rallied with the market, based on BNY Investments data. That kind of narrow action can happen, but its length mattered. When gains keep coming from a tiny group, spreading bets hurts results.
The same pattern showed up in the indexes. The S&P 500 beat its equal-weighted version all year. For investors, the choice was; go underweight large stocks and lag, or hug the index and explain why an active equity fee made sense.
In the U.S., 73% of equity mutual funds lagged their benchmarks in 2025, according to Athanasios Psarofagis of Bloomberg Intelligence. That ranked as the fourth-worst showing since 2007. Results got worse after April’s tariff scare faded and excitement around artificial intelligence locked in tech leadership.
There were exceptions, but they carried different risks.One came from Dimensional Fund Advisors.Its $14 billion International Small Cap Value Portfolio returned just over 50%, beating its benchmark, the S&P 500, and the Nasdaq 100.
The fund held about 1,800 stocks, mostly outside the U.S., with large exposure to financials, industrials, and materials. It avoided the U.S. large-cap index almost entirely. Joel Schneider, deputy head of portfolio management for North America, summed it up. “This year provides a really good lesson,” Schneider said. “Everyone knows that global diversification makes sense, but it’s really hard to stay disciplined and actually maintain that.”
Another case came from Margie Patel at the Allspring Diversified Capital Builder Fund. The fund returned about 20%, helped by bets on Micron Technology and Advanced Micro Devices. Patel pushed back on closet indexing. “A lot of people like to be closet or quasi indexers,” she said on Bloomberg TV. “The winners are going to stay winners.”
Big stocks getting bigger fueled bubble talk. The Nasdaq 100 traded above 30 times earnings and near six times sales.
Dan Ives of Wedbush Securities, who launched an AI-focused ETF in 2025 that grew to almost $1 billion, said volatility was part of the trade. “There are going to be white-knuckle moments,” Ives said. “We believe this tech bull market goes for another two years.”
VanEck’s Global Resources Fund rose almost 40%, driven by demand tied to energy, farming, and metals, as the fund owns Shell, Exxon Mobil, and Barrick Mining, and mixes geologists with analysts. Shawn Reynolds, who has run it for 15 years, said active management allows big thematic bets.
Don’t just read crypto news. Understand it. Subscribe to our newsletter. It’s free.
