This article looks at the pros and cons of active and passive investing so you can determine what role these strategies should play in your portfolio.
Definitions
The terms active and passive describe fund management styles.
The holdings of passively managed funds mirror an index, such as the S&P 500 Index, MSCI International Index or Bloomberg U.S. Aggregate Bond Index. Passively managed funds seek to closely track the performance of the index.
Actively managed fund managers use research and analysis to buy and sell securities, seeking to achieve returns that surpass their benchmark index.
Active Management: Pros
- Risk Management – Active managers have the flexibility to adjust holdings based on research, valuation, or market conditions.
- Flexibility – Active fund managers can purchase investments they believe will exceed the average return of the index and limit exposure to investments the fund manager believes will underperform the index.
- Research – Active managers allocate significant resources to analyzing economic trends, market sectors and individual companies to find the investments they feel can maximize returns.
- Opportunistic – Active managers can use a variety of techniques intended to minimize their losses in down markets or when the managers perceive risks.
Active Management: Cons
- Higher expenses – Actively managed funds charge higher fees than passively managed funds because research is expensive. In addition, active buying and selling incurs transaction costs.
- Manager risk – When active managers are right, investment returns exceed the index; when they are wrong, returns can lag behind passively managed funds.
- Fewer holdings – Actively managed funds may hold fewer investments than funds that mirror an index.
What to Look for in Actively Managed Funds
- Objectives and strategy – Look for actively managed funds with well-defined investment goals that reflect your investment approach.
- Experienced management – The funds should have a tenured team of portfolio managers and analysts who have the tools in place to yield strong performance in the long run.
- Track record – Look for funds with good track records in both up and down markets.
- Fees – Focus on actively managed funds with relatively lower fees.
Passive Management: Pros
- Lower expenses – Passive fund managers only purchase securities that mirror the index. This does not require a staff of analysts. Because indexes change infrequently, transaction costs are lower.
- Consistency of holdings – Passive funds generally hold all, or a representative sample, of the securities in the index. The funds also seek to hold these securities in the same proportion as the index.
Passive Management: Cons
- Lack of flexibility – Passive funds are limited to a specific index or predetermined set of investments with little to no variance. This means that investors are locked into those holdings regardless of whether a sector or individual company underperforms the market.
- Returns do not beat the index – By definition, passive funds are not designed to beat the market because their holdings mimic the index.
The Role of Active and Passive Funds in Your Portfolio
The Joint Retirement Board 403(b)(9) Retirement Plan offers both actively managed and passively managed investment options. With the support of its investment advisor, the JRB’s Investment Review Committee regularly reviews the Plan’s investment menu, including each fund’s role in the lineup, investment objective, performance, management, risk profile, and fees.
Active and passive strategies can both play a role in a diversified retirement portfolio. Passive index funds may offer broad market exposure at low cost. Actively managed funds may offer the opportunity for a manager to add value through research, security selection, and portfolio positioning, although there is no guarantee that an active manager will outperform its benchmark.
To reach your retirement goal, the amount you save is the most important factor. The second most important investment decision you make is building a portfolio that is appropriate for your goals, investment timeline and risk tolerance. Choosing between passively and actively managed funds is an important part of this process.
Once you choose an appropriate mix of investments for your portfolio, take a long-term perspective. Be disciplined. Avoid emotional decisions based on short-term ups and downs of the market.
Balance the expenses charged by actively managed funds against the value that fund managers bring to the selection of securities and potential achievement of higher overall returns.
You don’t need to choose between passive and active investments. Many participants use both approaches as part of a long-term retirement strategy.
At the Joint Retirement Board, our investment lineup includes a thoughtful mix of both active and passive options, giving participants the flexibility to build a well-diversified retirement portfolio.
May 2026
This information is for general purposes only and does not constitute legal, tax or investment advice.