Understanding Active and Passive Mutual Funds

Learn more about the differences between these two investment types.

If you’re interested in investing in mutual funds or exchange-traded funds (ETFs) – or you already have some in your portfolio – you may be wondering what exactly the difference is between an active and a passive fund.

The subjects

An active fund comprises stocks and bonds that have been selected by a portfolio manager for the fund, while a passive fund tracks an index, like the S&P 500. The passive fund often uses a representative sampling method to “match” the characteristics of the index in the fund, and its intention is to reflect overall market performance. Generally, active funds try to beat the market while passive funds reflect the market.

The testimony

Here’s a summary of how the two approaches differ.

Active Funds and Passive Funds