What is the difference between passive and active asset management?

Kevin Michels, CFP®, EA
Medicus Wealth Planning, Draper, UT

Many mutual funds use active management. For example, a mutual fund that invests in large U.S. companies would most likely use the S&P 500 Index as its benchmark. The objective of the fund would be to outperform the return of the S&P 500. The fund will do this by employing a manager and a team of analysts. The fund manager will pick stocks that he believes will outperform the S&P 500.

Normally, you pay more to invest in an actively-managed fund since you are paying for the fund manager’s expertise.

Passive management is usually done via ETFs or index mutual funds, which track a benchmark. The goal is to match the return of a benchmark, such as the S&P 500. Typically, it is much less expensive to employ passive management, as you aren’t paying a manager for their expertise.