What is active and passive fund management?

Active and passive fund management describe different approaches to building a portfolio. An active manager selects investments within the fund’s rules, perhaps to outperform a benchmark or meet a particular investment objective.

An index fund aims to follow its chosen index. It may hold every constituent or use a sampling approach. Passive does not mean the fund never trades: holdings may need adjustments when the index changes.

Example: the same stocks, different weights

Imagine an index with a 60% allocation to stock A and 40% to stock B. A simple, fully replicating passive fund targets those weights, while an active manager whose mandate permits it might hold 50% in each. The portfolios then respond differently to price changes; making active choices does not guarantee better returns.

An ETF is an exchange-traded fund structure, not a synonym for passive management. Cathie Wood’s ARKK illustrates an active approach. Costs and differences between the portfolio and its benchmark still matter when assessing either method.