Passive Funds Versus Active Funds: The Conclusive Results (2024)

FAQs

Do active funds perform better than passive funds? ›

While passive funds still dominate overall due to lower fees, some investors are willing to put up with the higher fees in exchange for the expertise of an active manager to help guide them amid all the volatility or wild market price fluctuations.

Key Takeaways. Active management requires frequent buying and selling in an effort to outperform a specific benchmark or index. Passive management replicates a specific benchmark or index in order to match its performance.

For example, when the market is volatile or the economy is weakening, active managers may outperform more often than when it is not. Conversely, when specific securities within the market are moving in unison or equity valuations are more uniform, passive strategies may be the better way to go.

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.

Of the nearly 3,000 active funds included in our analysis, 47% survived and outperformed their average passive peer in 2023.

Passive investment is less expensive, less complex, and often produces superior after-tax results over medium to long time horizons when compared to actively managed portfolios.

Some investors prefer passive portfolio management due to its simplicity, lower costs, and long-term focus.

Disadvantages of Active Management

Actively managed funds generally have higher fees and are less tax-efficient than passively managed funds. The investor is paying for the sustained efforts of investment advisers who specialize in active investment, and for the potential for higher returns than the markets as a whole.

In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons. Just one out of every four active funds topped the average of passive rivals over the 10-year period ended June 2023. But success rates vary across categories.

From 2000 to 2009, active outperformed passive nine out of 10 times. During the 1990s, passive outperformed active five out of 10 times. And over the course of the past 35 years, active outperformed 17 times while passive outperformed 18 times. We've seen that the cyclical nature of active vs.

What are the 5 advantages of passive investing? ›

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.

The objective of an active strategy is to achieve 'alpha' – in other words, to beat the market benchmark. “A passive strategy is more of a buy-and-hold strategy. You have to decide yourself when and how to reposition your exposure, whereas with active investing, it is done for you by the fund manager.”

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.

Passively managed funds include passive index funds, exchange-traded funds (ETFs), and Fund of funds investing in ETFs. These funds follow a benchmark and aim to deliver returns in tandem with the benchmark, subject to expense ratio and tracking error.

Most active funds lagging

Active equity funds rely on managers' decisions, while passive funds attempt to track indices efficiently. As per SPIVA, five out of 10 large-cap funds underperformed the S&P BSE 100, while over 73% of mid- and smallcap schemes lagged the S&P BSE 400 MidSmallCap in 2023.

An influential study[3] which used the concept of Active Share to assess returns over a 20-year period, found that the most active managers outperformed their benchmarks by 1.3 percent annually after fees whereas “closet indexers” unsurprisingly performed worst, lagging the benchmark by around 0.9 percent a year.

Therefore, active funds are more likely to beat the passive index funds during the down market. In this section, we compare the performance of the active funds and passive index funds over the business cycle. To determine the state of the economy, we the definition provided by NBER.

It found that over the course of one year, 51.08% of actively-managed mutual funds underperformed the S&P 500, and 48.92% of actively-managed funds outperformed the S&P 500. * However, those numbers change dramatically over longer periods of time.