Excess return is the holy grail for investors who want more than just a ride with the market. As economic conditions shift and regulatory changes roll out in 2025, understanding excess return is more crucial than ever for Australians eager to get ahead. Let’s break down what excess return really means, why it’s so important, and how you can use it to sharpen your investment strategy in today’s market.

What Is Excess Return and Why Does It Matter?

In simple terms, excess return is the difference between the return on your investment and the return of a benchmark index (like the ASX 200). It’s a direct measure of how much extra reward you’re getting for taking on risk or backing a particular strategy. Unlike absolute return, which tells you how much you earned, excess return answers the question: Did I actually beat the market?

Example: If your Australian equity fund returned 12% in 2024 and the ASX 200 returned 8%, your excess return is 4%.
For ETFs and managed funds, excess return is often the key number managers want to highlight.
For superannuation funds, excess return is now a central metric under APRA’s performance benchmarking regime.

How Excess Return Is Shaping Investment Decisions in 2025

In the past, many Australians were content with index-tracking funds. But 2025 has brought a renewed appetite for active management and alternative strategies, driven by several key trends:

APRA’s Superannuation Heatmaps: These tools now make it easier to compare funds by their excess return over 1, 3, and 5 years. Funds that consistently underperform are under the microscope, with millions of Australians nudged to consider switching for better outcomes.
ESG and Thematic Investing: As more Australians invest in sustainability and tech themes, measuring excess return versus a traditional index helps show whether these choices are actually paying off.
Fee Awareness: Even a 1% annual excess return can be eroded by high management fees. 2025’s fee wars among ETF providers mean investors are laser-focused on net-of-fee excess returns.

Regulatory changes are also reshaping the landscape. The Financial Accountability Regime (FAR) and strengthened product design rules mean providers are on notice to deliver genuine value—measured, in part, by excess return.

Strategies for Chasing—and Understanding—Excess Return

Outperforming the market isn’t easy, but there are practical ways Australian investors can tilt the odds:

Compare Apples to Apples: Always benchmark your investments against the right index. For example, compare your global tech ETF to the NASDAQ, not the ASX 200.
Watch for ‘Smart Beta’ and Factor Investing: Products that target value, momentum, or low volatility claim to offer higher excess return by systematically exploiting market anomalies.
Monitor Consistency: A single year of outperformance could be luck. Look for funds or strategies with positive excess return over 3–5 years.
Risk-Adjusted Excess Return: Tools like the Sharpe ratio help investors see if higher returns were achieved without excessive risk-taking.

Example: In 2025, several Australian ‘Green’ ETFs outperformed the broader market, delivering 2–3% annual excess return over three years. But after accounting for fees and volatility, only a handful maintained a positive risk-adjusted excess return—highlighting the need for careful analysis, not just headline numbers.

Looking Ahead: Excess Return in a Changing Market

With Australia’s investment landscape evolving—think higher interest rates, volatile commodities, and new tech opportunities—excess return is set to become an even more powerful yardstick. Whether you’re managing your super, picking ETFs, or working with a financial adviser, keeping a close eye on excess return (and what’s driving it) will help you make smarter, more confident decisions in 2025 and beyond.