ETFs & Funds · Beginner · 4 min

Active vs. passive

You can explain the difference between active and passive funds, why costs matter so much, and what long-term studies show about active results.

Pick or buy all?

You can pay professionals to choose the best shares for you. Or you can simply buy all the shares in an index and accept the market's result. The first sounds smarter. The second sounds lazy.

It is one of the oldest debates in investing, and unlike many debates, there is a lot of data on it. This lesson explains both approaches and what decades of measurements show.

Beat vs. match

Comparison Active funds pick stocks to beat the index at higher cost; passive funds copy the index at lower cost. Active Picks stocks Aims to beat the index Higher costs Passive Copies index Aims to match the index Lower costs

Active management means a fund's managers select investments they expect to do better than the market, and change them over time. That takes analysts, research and frequent trading. Active funds therefore charge higher fees.

Passive investing means holding what an index holds, in the same weights, and changing only when the index changes. Passive funds, including most ETFs, aim to match their index, not beat it. They need little research and trade less, so their costs are low.

There is a simple piece of arithmetic behind the debate. Before costs, all investors together own the whole market and earn its return. Some beat it, others trail it. After costs, the average investor must earn the market return minus what they paid. Whoever pays more in costs ends up with less, on average.

The measurements confirm it. S&P Dow Jones Indices publishes the SPIVA scorecards, which compare active funds with their benchmarks. In its US report for year-end 2025, about 90% of active large-cap funds trailed the S&P 500 over 15 years, and over 20 years almost 93%.

A second finding concerns repetition. S&P's persistence scorecards show that funds in the top group in one period rarely stay there in the following years. Picking the future winners in advance is the hard part.

Active management is not pointless. Some managers do beat their markets, and some areas are harder to index. But the data shows how high the bar is once costs are counted.

~90% trailed

Imagine 100 fictional active funds investing in large US companies over 15 years. Based on the SPIVA ratio, around 90 of them would end up behind the S&P 500.

The passive investor gives up the chance to beat the market. In return, they avoid the much larger chance of trailing it by more.

Common mistakes

The takeaway

Active funds try to beat the market and charge more. Passive funds copy an index at low cost. Most active funds trail their index over long periods.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

  1. 1Tap the approach that aims to match the index rather than beat it.

    Tap the chart.

    Comparison Chart for the question: Tap the approach that aims to match the index rather than beat it. Active Picks stocks Aims to beat the index Higher costs Passive Copies index Aims to match the index Lower costs

    A passive fund holds what the index holds. It will trail the index by roughly its costs.

  2. 2According to S&P's SPIVA report for year-end 2025, what share of US large-cap active funds trailed the S&P 500 over 15 years?

    The SPIVA U.S. Year-End 2025 scorecard puts it at 89.93% over 15 years.

  3. 3Why do costs matter so much when comparing active and passive funds?

    On average, investors own the market. Whoever pays more in costs ends up with less, on average.

  4. 4An active fund beat its index last year. What does that tell you about next year?

    S&P's persistence scorecards find that few top-performing funds stay at the top over several years.

of 4 correct.

Sources