This is a strategy that involves a lot of buying and selling of investments with the goal of beating the market. With an active management approach, success is measured by comparing a fund or portfolio’s returns to a relevant benchmark.
For example, the performance of an actively managed Canadian equity mutual fund could be measured against the S&P/TSX Composite Index, the benchmark index for the Canadian market. Active investors attempt to gain more than the benchmark index when the market is up and to lose less when the market is down.
- Actively managed mutual funds are the most common product for this investment strategy.
- There are also actively managed exchange-traded funds (ETFs).
Passive investors believe it’s hard to beat the market with active trading, especially over the long term. Instead, they’ll look to match market performance with a passive management approach. They’ll buy investments that track a benchmark index, such as the S&P/TSX Composite Index, Dow Jones Industrial Average, or the S&P 500. Fees could be lower with this strategy.
- Passively managed ETFs are the most common product for this investment strategy.
- There are also passively managed mutual funds.
A quick comparison
|Feature||Active Investing||Passive Investing|
|Performance||Provides the opportunity to outperform specific market indices.|
|Delivers returns that match the performance of specific market indices.|
|Fees||Active investing strategies tend to result in higher fees over time.||Passive investing strategies could result in lower fees over time.|
|Risk management||Active fund managers can attempt to minimize losses during a market downturn by adjusting a fund’s investment mix.||Passive funds track a particular index. When the stock market falls, passive funds fall along with it.|
|Diversification||Active fund managers can assemble diversified portfolios that spread the risk and reward among different asset classes.||Passive funds are a low cost way to be diversified within asset classes and market segments.|
Your choice depends on your investing personality
Active and passive investing each have their unique benefits. It doesn’t matter whether you’re investing on your own or working with a financial adviser, you can choose either approach, or do a combination of both. In fact, many advisers will recommend a blend of active and passive styles.
The choice of investing style really depends on your investment goals and what matters to you as an investor. Determine your investing personality.
Choose the investing approach that’s right for you: Active investing, passive investing, or a combination of both.