Active investing often includes high volume trading and market timing strategies meant to beat the stock market’s average returns. It may be costly, as active portfolio managers frequently charge high fees.1 Active investing relies heavily on the portfolio manager assessing the “right” time to buy or sell, which is very difficult to do correctly.
A passive investment strategy, however, focuses on investing for the long haul, evaluating growth over time. As there is no stock picking, fees can be much lower. Passive investing is typically more transparent and tax efficient. It's not a get-rich-quick strategy, but instead one which seeks to invest over time with reasonable risk to increase wealth.
Actively managed investment funds can negatively impact your portfolio by eating into your returns. If the fees and expenses associated with these funds are high, it is more difficult for the portfolio to outperform a benchmark or index, and you may end up with lower returns as a result. Every dollar you pay in fees is a dollar that is not being invested, and therefore is missing out on the benefits of compound interest over time.
When it comes to taxes, passively managed funds tend to have an advantage over actively managed funds. Though both types of holdings will require you to pay taxes on realized capital gains if you sell fund shares for a profit in a taxable account, passively managed funds generally benefit from fewer taxable events generated within the funds themselves. When an investment fund generates a profit, such gains are returned to the shareholder as capital gains distributions, which are then taxed by the IRS. Because passively managed funds track an index, there is less buying and selling within the funds themselves (as generally compared to actively managed funds), and therefore less taxable distributions of capital gains.
Too often, investors lose track of the true costs of their investments or find it burdensome to sort out the details on capital gains taxes, transaction fees, fund performance, and more.
One way to combat unnecessarily high fees and complexity is to practice passive investing by utilizing index funds. Unlike most mutual funds, an index fund does not have a fund manager making active decisions about what to buy and sell each day. The job of the people running the index fund is to closely track its underlying "basket" of securities. (For example, all of the large companies in America. Or all of the publicly traded real estate investment trusts.) Over the long run, it is very difficult for actively managed U.S. equity funds to outperform their benchmark indexes. Over the past 15 years, 89.50% of actively managed U.S. Large-Cap Funds underperformed the S&P 500.2 When you consider the typically high fees of active management, it becomes hard to justify this approach when an investor is looking to optimize their portfolio over time.
The debate over active vs. passive management is ongoing. There is a wealth of empirical evidence for investors to assess, though, with more resources added every year. S&P Dow Jones Indices, LLC, for instance, publishes their SPIVA U.S. Scorecard semiannually, comparing active managers’ returns to those of the S&P indexes. Below, you can find the most recent SPIVA U.S. Scorecard, and some statistics on the percentage of U.S. equity funds underperforming their benchmarks based on absolute returns as of 2024:
Visit the 2024 Year End SPIVA Scorecard here to view statistics on the performance of actively managed funds in relation to their benchmark indexes over varying time periods.
1. Investment Adviser Association, "What Is Active Management?" January 10, 2025.
2. SPIVA U.S. Scorecard Year End 2024
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