An Active ETF Beats the Market by 3 Points. Is That Skill?
Compare two hypothetical ETFs using return, CAPM alpha and Sharpe ratios, then examine official FBCG and IWF annual returns for 2021–2025 without confusing outperformance with manager skill.
01 · The question
A 12% return against 9%: what does that establish?
Alex sees that active ETF A delivered a 12% annual net total return while its market benchmark returned 9%. The same initial investment would have grown more in A. Its benchmark-relative outperformance is 3 percentage points. That arithmetic establishes a return difference, rather than evidence of stock-picking skill.
Alex also considers passive ETF B, which returned only 8.8% but may have taken less risk. Did A earn enough extra return to compensate for its additional risk? A and B in the first half of this case are entirely hypothetical. They are not FBCG and IWF, and these assumptions are not forecasts for any actual fund.
02 · Shared assumptions
Compare one annual period against one market benchmark
Both scenarios use a 9% market return and a 2% risk-free rate. Their annual total returns already reflect fund-level expenses and reinvested distributions. The separately listed expense ratios provide cost context; they are not deducted again. Individual investor taxes, trading commissions and bid–ask spreads are outside this simplified model.
A has a beta of 1.5 and annualized standard deviation of 25%, compared with 1.0 and 15% for B. A leads B by 3.2 percentage points in annual return, but also has greater market sensitivity and total volatility. Rates, returns and risk inputs use a consistent annual basis; dividing an annual return by monthly volatility would change the meaning of the comparison.
| Measure | Active A | Passive B |
|---|---|---|
| Annual net total return | 12.00% | 8.80% |
| Beta | 1.50 | 1.00 |
| Annualized standard deviation | 25.00% | 15.00% |
| Assumed annual expense ratio (information only) | 1.00% | 0.20% |
| Benchmark-relative excess return (percentage points) | +3.00 | -0.20 |
| Simplified CAPM alpha (percentage points) | -0.50 | -0.20 |
| Sharpe Ratio | 0.4000 | 0.4533 |
A and B are educational assumptions, not FBCG or IWF. Bold marks the higher return, alpha or Sharpe number, not investment quality. Risk inputs and fees have no universal winner. Expense ratios do not reduce these net returns a second time.
03 · Market risk
What return does the market exposure call for?
Beta measures sensitivity to the shared market benchmark, not every source of risk. Here the market risk premium is 9% − 2% = 7 percentage points. CAPM calls for 2% + 1.5 × 7% = 12.5% for A, and 9% for B. A’s simplified alpha is therefore 12% − 12.5% = −0.50 percentage points; B’s is 8.8% − 9% = −0.20 percentage points.
A beat the benchmark by 3 points yet fell short of the model return associated with its beta. Benchmark-relative outperformance, model-adjusted alpha and manager skill are distinct ideas. This illustration plugs a hypothetical one-period return and a supplied beta into CAPM. It has no historical time-series regression, estimation uncertainty or significance test, so it is not a reliable historical Jensen’s alpha or an assessment of manager ability.
The Beta guide separates market sensitivity from total risk. The CAPM guide explains the required return, while the Alpha and active ETFs guide distinguishes model adjustment from simple outperformance.
04 · Total risk
Does the ranking change per unit of total risk?
The Sharpe ratio divides return above the risk-free rate by the standard deviation for the same period. A has (12% − 2%) ÷ 25% = 0.40; B has (8.8% − 2%) ÷ 15% ≈ 0.4533. B’s total return is lower, but its assumed excess return per unit of total volatility is higher. The ratio is dimensionless, rather than a percentage or a percentage-point difference.
Beta concerns shared market movements; standard deviation measures overall return dispersion. They are not interchangeable. Sharpe does not capture every risk, including liquidity and tail losses, and comparisons of negative ratios need particular care. This controlled example illustrates different questions, rather than choosing the best ETF from one score.
The Sharpe Ratio guide explains why returns and total volatility must use a consistent period and what the measure leaves out.
05 · An isolated experiment
Change beta alone and trace the result
Keep A’s return at 12% and reduce only beta from 1.5 to 1.2. CAPM then calls for 2% + 1.2 × 7% = 10.4%, so simplified alpha becomes +1.60 percentage points. A’s annual return and benchmark-relative gap have not changed. Neither has Sharpe, because the risk-free rate and standard deviation stayed fixed.
Isolating one variable reveals how alpha depends on a risk assumption. It does not mean a real fund’s beta can be reduced at will while every other characteristic remains unchanged. In the scenario tool, adjust beta, volatility and return separately to see which question each measure answers.
Hold return at 12%; adjust A’s beta
Annual net return 12%, standard deviation 25%, market return 9% and risk-free rate 2% stay fixed. This isolates a model assumption, rather than simulating a freely adjustable real fund.
06 · Fixed historical research
Leave the hypothetical inputs behind and examine history
The first two ETFs were designed to explain the formulas. The following research instead covers five complete calendar years, January 1, 2021 through December 31, 2025, for the US-listed FBCG and IWF. It is a fixed snapshot, with no live prices or automatic refresh. Only official annual total returns and return differences are compared; none of A and B’s hypothetical betas, volatilities or fees is assigned to these real funds.
Why compare FBCG with IWF?
FBCG (Fidelity Blue Chip Growth ETF) is actively managed, launched June 2, 2020, and selects large- and mid-cap blue-chip companies with growth potential. Its official benchmark is the Russell 1000 Growth Index. Its semi-transparent structure uses portfolio disclosures that differ from those of a conventional index ETF.
IWF (iShares Russell 1000 Growth ETF), launched May 22, 2000, passively tracks the same index to provide US large- and mid-cap growth-stock exposure. Their related growth styles, common index connection and five overlapping complete years make an informative comparison of active selection with passive tracking, using official sources rather than third-party live quotes. They do not have identical holdings, sector weights, concentration, investment scope or risk.
FBCG versus its official index asks whether the fund outperformed its benchmark. FBCG versus IWF compares two investable products, each with its own implementation and costs. An index return is not an expense-free ETF return an investor can buy directly.
Bold labels mark the highest signed return in each year, including the smallest loss; they do not rate investment quality.
Same scale for every year: losses left of zero, gains right.
2021
2022
2023
2024
2025
| Year | FBCG | IWF | Russell 1000 Growth |
|---|---|---|---|
| 2021 | 21.11% | 27.37% | 27.60% |
| 2022 | -39.01% | -29.26% | -29.14% |
| 2023 | 57.72% | 42.49% | 42.68% |
| 2024 | 39.30% | 33.11% | 33.36% |
| 2025 | 18.36% | 18.34% | 18.56% |
Bold marks the highest signed return in each year, including the smallest loss. It does not rate investment quality.
| Year | FBCG − IWF | FBCG − index |
|---|---|---|
| 2021 | -6.26 | -6.49 |
| 2022 | -9.75 | -9.87 |
| 2023 | +15.23 | +15.04 |
| 2024 | +6.19 | +5.94 |
| 2025 | +0.02 | -0.20 |
Bold marks the larger signed difference within each row. The two columns use different comparison targets; this does not identify a better investment.
Read the difficult years alongside the strong ones
In 2021 FBCG lagged IWF by 6.26 percentage points. In 2022 both lost money, and FBCG’s 39.01% fall was 9.75 points deeper than IWF’s. The next two years reversed that ordering: FBCG led IWF by 15.23 points in 2023 and 6.19 points in 2024, also beating the index in each year. The same strategy can participate strongly in an advance and experience a larger decline.
In 2025 FBCG’s 18.36% was just 0.02 percentage points above IWF’s 18.34%, yet 0.20 points below the index’s 18.56%. Beating the passive product and beating the official benchmark are different statements. A positive return gap in one year is not, by itself, a risk-adjusted alpha or evidence of skill.
Fees are already reflected in the fund returns
The FBCG expense ratio in the September 30, 2026 Fidelity fact sheet is 0.57%; the IWF ratio in the June 30, 2026 iShares fact sheet is 0.18%. These are dated cost disclosures, verified 2026-10-18, rather than evidence that fees stayed unchanged throughout 2021–2025. Annual NAV total returns already reflect fund-level expenses and reinvested distributions, so subtracting those ratios again would double-count costs.
Why this research does not estimate historical alpha or Sharpe
Five annual observations can describe annual performance, but are insufficient for a reliable historical Jensen’s alpha, beta or Sharpe estimate here. That would require appropriately frequent returns, a matched sample period, a common market benchmark and consistent risk-free observations. An IWF three-year Equity Beta measured against the S&P 500 cannot be treated as beta against Russell 1000 Growth or combined with unrelated periods. No such historical risk estimates are presented.
A bounded observation, rather than a permanent winner
Active management can produce stronger annual returns and larger losses; it does not guarantee an advantage over passive investing. Fees, strategy, concentration, benchmark choice and the observation period all affect the comparison. Neither one year of outperformance nor a five-year window proves persistent manager skill. Past performance does not guarantee future returns, and this case recommends neither fund.
Sources and methodology
- Fidelity Blue Chip Growth ETF Fact Sheet · as of 2026-09-30 · FBCG and index annual returns; expense ratio
- iShares Russell 1000 Growth ETF Fact Sheet · as of 2026-06-30 · IWF annual returns and expense ratio
- iShares Russell 1000 Growth ETF Fund Information · objective, inception and performance definitions
- Fidelity Blue Chip Growth ETF SEC Prospectus · active strategy and disclosure structure
Further comparison
Compare assumptions before drawing a conclusion
Return, benchmark-relative performance, simplified alpha and Sharpe answer different questions. Open the comparator with the hypothetical beta selected above to inspect each calculation and experiment with the other assumptions. The historical fund observations remain separate.
Explore further
Want to understand a concept, or calculate just one part? Continue here.
- Alpha and active ETFs
- Beta and systematic risk