Passive management

Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio.^[1][2] Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.^[3]

The most popular method is to mimic the performance of an externally specified index by buying an index fund. By tracking an index, an investment portfolio typically gets good diversification, low turnover (good for keeping down internal transaction costs), and low management fees. With low fees, an investor in such a fund would have higher returns than a similar fund with similar investments but higher management fees and/or turnover/transaction costs.^[4]

The bulk of money in Passive index funds are invested with the three passive asset managers: BlackRock, Vanguard and State Street. A major shift from assets to passive investments has taken place since 2008.^[5]

Passively managed funds consistently overperform actively managed funds.^[6][7][8] More than three-quarters of active mutual fund managers are falling behind the S&P 500 and the Dow Jones Industrial Average. The S&P Indices versus Active (SPIVA) scorecard, which tracks the performance of actively managed funds against their respective category benchmarks, recently showed 79% of fund managers underperformed the S&P last year. It reflects an 86% jump over the past 10 years.^[9][10] In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons; only 25% of all active funds topped the average of their passive rivals over the 10-year period ended June 20214.^[11] Warren Buffett has long been a strong proponent of passive investing.^{[12][13][14][15]}