The Difference Between Passive vs Active Portfolio Management (2024)

FAQs

The Difference Between Passive vs Active Portfolio Management? ›

Key Takeaways. Active management

Passive strategies involve minimal trading and research, resulting in lower transaction fees and management expenses. Active management, on the other hand, requires ongoing research, frequent trading, and managerial expertise, leading to higher costs.

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.

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.

Unlike passive risk management, which involves merely reacting to risks as they arise, active risk management emphasizes continuous monitoring and timely response to potential threats.

Passive portfolio management is a strategy used by index funds. In these types of funds, the mutual fund company buys and sells stocks to match or approximate a market index or benchmark. For example, one mutual fund portfolio might attempt to mirror the S&P 500 stock market index.

Portfolio and passive income are frequently confused, but essentially if you're making returns by investing in securities, including crypto, that's portfolio income, not passive income. A taxpayer can claim a passive loss against income generated from passive activities.

Actively managed funds require a hands-on approach where a manager decides how funds are invested, while a passively managed fund is more hands-off and typically follows a market index, such as the S&P 500.

“Active” Advantages

Among the benefits they see: Flexibility – because active managers, unlike passive ones, are not required to hold specific stocks or bonds. Hedging – the ability to use short sales, put options, and other strategies to insure against losses.

As the ETF market has evolved, different types of ETFs have been developed. They can be passively managed or actively managed. Passively managed ETFs attempt to closely track a benchmark (such as a broad stock market index, like the S&P 500), whereas actively managed ETFs intend to outperform a benchmark.

Why do some investors prefer passive portfolio management? ›

Lower costs.

Passively managed investments typically have lower expense ratios and management fees compared to actively managed investments. This cost advantage can lead to higher net returns for investors.

Niche market advantages

Index funds need certain features in the markets they track to function effectively, such as low trading costs and liquidity. Active managers, on the other hand, thrive in the least efficient corners of the market where flexibility and knowledge are more important than size.

The main difference is that index funds are passively managed, while most other mutual funds are actively managed, which changes the way they work and the amount of fees you'll pay.

Key Takeaways

Passive management is a reference to index funds and exchange-traded funds that mirror an established index, such as the S&P 500. Passive management is the opposite of active management, in which a manager selects stocks and other securities to include in a portfolio.

Active risk is the risk a manager takes on in their efforts to outperform a benchmark and achieve higher returns for investors. Actively managed funds will have risk characteristics that vary from their benchmark.

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.

The term active management means that an investor, a professional money manager, or a team of professionals is tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it.

Active funds strive for higher returns and may provide better capital protection in turbulent markets but they come with higher costs and risks. Passive funds offer steady, long-term returns at lower costs but carry market-level risks.

Now, two approaches can be taken when designing portfolio management for retail investors—active and passive. This approach to portfolio management involves monitoring a client's investment portfolio regularly by the portfolio manager. The goal is to outperform the overall market or index.