NEW YORK (MarketWatch) -- Mutual fund investors in 2008 yanked more money out of actively managed stock-funds than they put in for only the third time ever, and index-fund rivals took the spoils.

The shift reflects a budding sentiment among many investors -- especially after a devastating 12 months -- that active fund management isn't always worth its higher fees. Index funds track a market benchmark and so provide average performance, typically at a much lower cost than actively run counterparts that try to beat the market on the upside and cushion blows on the downside.

Most managers fail to outperform their benchmark in a given year, however, and this unforgiving bear market is no exception. Average losses for stock-index funds last year were 39.1%, while actively managed funds lost 40.5% on average, according to investment researcher Morningstar Inc.

"Some people who get their hands burned by these market drops move from active to passive [management], and every time some of them stay there," said Morningstar analyst Scott Burns.

As well as pocketing lower returns, Burns said investors in actively run funds are more likely to chase performance and tend to be less focused on asset allocation. As such, they are quicker to dispose of their holdings.

Index-fund investors, meanwhile, more often use those funds as part of a balanced allocation among stocks and bonds that can see them through tough times in the markets, Burns said.

"Passive investors already had a nice stockpile of fixed-income [holdings]," he added. Indexing, he added, "gains more converts" after each market downturn.

ETFs advance

Actively managed stock funds saw net outflows of $221.8 billion in 2008, while index funds saw net inflows of $17.6 billion, according to data from fund-tracker Lipper Inc.

Index funds' share of the marketplace rose 1.4 percentage points in 2008 to 13.2% from 11.8% a year earlier. Total assets in index funds at year's end were $490 billion; actively managed stock funds held $3.2 trillion, according to Lipper.

The change in market share doesn't include one growing player in the stock fund world: exchange-traded funds, which are indexed portfolios that trade on an exchange like stocks.

ETFs are enormously popular with institutional investors and financial advisers, and lately with individual investors as well. Total assets in stock ETFs grew from $15.6 billion at the end of 1998 to $473.9 billion at the end of 2008, according to the Investment Company Institute. The ETF figures include bond funds, which stood at $57.2 billion on Dec. 31, according to ICI.

When ETF assets are included in index funds' market share, indexed investment strategies' total slice of the pie grows to 21.4%, and the challenge to actively managed funds becomes even clearer.

"ETFs offer a broad range of indexes for investors," said Tom Roseen, senior analyst at Lipper. "Investors now have access to indexed strategies that didn't exist with mutual funds."

Other years in which stock funds saw net outflows were 1998 and 2002. And while investors subsequently returned, actively managed funds surrendered market share to index funds each time.

Index funds have steadily won over investors since Vanguard Group launched the first retail index fund, Vanguard 500 Index VFINX, -0.46% , in 1976.

Figures from Lipper show that the share grew throughout the 1990s and spiked late in the decade as assets left actively managed funds.

In 1998, actively managed stock-funds saw net outflows of $9.3 billion while index funds saw net inflows of $107 million. The share of stock-fund assets held in index funds rose from 6.4% to 7.9% that year, and again in 1999 to 10.8%.

Different funds, same results

Despite the shift to indexed offerings in times of trouble, the performance of both active and index funds is, on average, very similar -- as last year's results show.

"You still have some very dour situations," in index funds in 2008, Roseen said. In fact, in some cases, such as financials, index funds carried greater risk because the funds couldn't dump the tanking stocks unless or until they were removed from indexes.

But despite this danger, it seems that one take away for investors may have been a loss of faith in active managers.

"It could be that some people are adopting [Vanguard founder and indexing pioneer] Jack Bogle's long held advice of not buying too many funds, staying well-diversified and keeping costs low," Roseen said.

He added: "Perhaps they've just said to themselves, 'We do know that actively managed funds can win, but not all the time, so let's just shift to indexing.'"