Active vs Passive Funds: Top 4 Differences (2024)

FAQs

What are the main differences between passive and active funds? ›

The Bottom Line

Passive investing is buying and holding investments with minimal portfolio turnover. Active investing is buying and selling investments based on their short-term performance, attempting to beat average market returns. Both have a place in the market, but each method appeals to different investors.

In general terms, active management refers to mutual funds that are actively managed by a portfolio manager. Passive management typically refers to funds that simply mirror the composition and performance of a specific index, such as the Standard & Poor's 500^® Index.

Active Funds Fell Short of Passive Funds in 2023

In 2023, actively managed mutual funds and ETFs fell short of their passive peers. While notching an improvement over 2022, slightly less than half (47%) of active strategies survived and delivered higher net-of-fees returns than their average passive counterpart.

Passive investing is often less expensive than active investing because fund managers are not picking stocks or bonds. Passive funds allow a particular index to guide which securities are traded, which means there is not the added expense of research analysts. Even passively managed funds will charge fees.

Active income, generally speaking, is generated from tasks linked to your job or career that take up time. Passive income, on the other hand, is income that you can earn with relatively minimal effort, such as renting out a property or earning money from a business without much active participation.

Typically, passive investments are lower cost, as investors are not paying for the fund manager's expertise in choosing the investments in the fund. Active funds, on the other hand typically charge a base fee and a performance fee, to incentivise the fund manager to produce the highest possible return.

Active investors buy and sell assets in an effort to outperform the market. Passive investors take a buy-and-hold approach, limiting the number of transactions they carry out, and typically try to match, rather than beat, the market.

Active investments are funds run by investment managers who try to outperform an index over time, such as the S&P 500 or the Russell 2000. Passive investments are funds intended to match, not beat, the performance of an index.

Active income is what you earn from your day-to-day job, where you trade your time for money. It's direct compensation for services rendered, such as salaries, wages, and business income. On the flip side, passive income involves earning without being actively involved on a daily basis.

What is the difference between active and passive property investment? ›

Q: What is the difference between active and passive real estate investment? A: Active investment is a hands-on role where you'll manage the property directly. Passive investment is a backseat approach; you'll put money into a syndication or REIT and spend much less time on day-to-day operations.

Typically, active target date providers have the flexibility to allocate to any liquid capital market and they have targeted exposures while their passive counterparts may lack exposures to certain asset classes that may be too costly to replicate.

Nature: Active funds are more dynamic and flexible, as they can adapt to changing market conditions and opportunities. Passive funds are more static and rigid, as they follow a predetermined strategy and do not deviate from the index.

Actively managed investments tend to generate higher returns since they take on more risk. Passively managed investments have an average and stable return. Costs are high for active management strategies because the level of order placement is relatively frequent. Index funds have lower costs than other funds.

With an active fund, you're more exposed to market volatility and potential losses. A laid-back look, or a passive fund, is slow and steady. Passive funds are a low-cost investment option that tracks the performance of market indices, such as the FTSE 100.

Active investors buy and sell assets in an effort to outperform the market. Passive investors take a buy-and-hold approach, limiting the number of transactions they carry out, and typically try to match, rather than beat, the market.

Active fund managers will have a team of analysts who often meet with management to gain a better understanding of the issuing company. Passive investment costs tend to be far lower. With actively managed funds, there is also a risk that the investment decisions made by the managers could turn out to lose money.