Active vs passive investing – what’s the difference?

There are two main ways of investing in the market through funds – one is described as active, and the other is known as passive.

What is a fund?

To understand the difference between active and passive investing, you also need to know how funds work. 

A fund is an investment that pools money from many investors to purchase a diversified portfolio of assets like stocks, bonds, or property. Funds are often a good starting place for someone new to investing rather than shares in individual companies. That’s because funds enable you to achieve instant diversification.

Rather than buying one or two company shares yourself, a fund will give you access to a basket of many different companies, typically between 20 and 200, or a collection of holdings of another asset class.

What is active investing?

An actively managed fund is run by a professional fund manager who picks the stocks or other investments for the portfolio.

Pros of active investing

With actively managed funds, the fund manager will employ an active strategy regularly reviewing the fund’s portfolio, adjusting as they see fit – by buying or selling holdings. The fund manager can also actively monitor wider stock market movements, so you don’t have to. 

Actively managed funds also have the potential to do better than the wider market, as opposed to just offering the same return as the market.

Cons of active investing

As well as having the capacity to do better than the market, actively managed funds can perform worse and many do. An investor is very much at the mercy of the fund manager’s performance and their ability to navigate any market volatility. 

Actively managed funds also come with extra costs attached because, unlike with a passive fund, you’re paying for the investments to be managed by a professional or team of professionals.

What is passive investing?

A passive fund, sometimes known as a tracker, simply looks to replicate the performance of an underlying group of investments. This could be a stock market index like the FTSE 100 or S&P 500, a collection of commodities, a basket of bonds or investments related to a specific theme or industry sector.

Pros of passive investing

A key advantage of passive investing is cost. This category of fund is simply looking to achieve the return of an underlying market, so fees for tracker funds are traditionally lower than those for actively managed funds.

For example, research by AJ Bell in 2024 found the average passive fund in the global equity category was more than six times cheaper than the equivalent active fund (0.14% annual charge versus 0.9% respectively).

Typically, funds tracking major indices like the FTSE 100 have lower fees than those tracking more niche markets, assets or themes.

Cons of passive investing

The downside of a passive investment is that it is only designed to deliver the return of the relevant market – minus any fees. In comparison, a fund manager employing an active strategy aims to beat the market and they will regularly review the fund’s portfolio.

However, as our Manager versus Machine report shows, over the last decade only 30% of active managers outperformed a passive alternative across seven key equity sectors.

The picture is beginning to look a little brighter for active managers in the global equity category, where 51% outperformed in the first six months of 2025 (the highest since the report began in 2021).

It’s worth remembering this performance is far from guaranteed to continue. Equally, if you’re not satisfied with an underperforming fund, you always have the option of selling it and buying an alternative.

Comparing active and passive investing

Using ETFs for passive investing

Among the most popular form of passive fund is an exchange-traded fund (ETF) and there are more than 2,000 of these vehicles listed on the UK market.

There are also tracker funds which operate under a more traditional fund structure, but ETFs enjoy the transparency of being traded on a stock market. You can see a full list of their holdings, and, unlike traditional open-ended funds, you know the price you’re trading at instantly rather than within 24 hours of making the trade.

What are active ETFs?

A relatively recent development is the emergence of so-called ‘active’ ETFs. These products invest in stocks, bonds and other asset classes selected by a fund manager, and they usually aim to beat a relevant benchmark or index rather than just matching it.

Sitting somewhere between active and passive products are smart beta ETFs, which use a rules-based approach, based on factors like value, growth, low volatility and momentum, to select a basket of investments. Unlike an active ETF, they don’t employ a manager to select them. Admittedly, most active ETFs will have higher charges than passive ETFs.

Most active ETFs have ‘active’ in their name and, with our ETF screener, you can filter using this word. There’s a relatively modest universe to choose from for now, but the list is growing.

Combining active and passive investing 

Active and passive are not mutually exclusive strategies. You might, for example, want to get broad-based market exposure using an ETF but also invest in some active funds too, perhaps for more niche areas or specific goals like generating an income.

However, if you lack the time or inclination to do lots of research on individual funds, tracker funds offer straightforward exposure to the part of the market from which you hope to generate returns.