Why active versus passive investing isn’t so black and white anymore

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12 March 2026

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Equal weighed exchange-traded funds (ETFs for short) have emerged as one of the more popular investment trends in recent months as investors seek new ways to diversify their exposure to major equity markets. 

These products are distinct from a ‘typical’ ETF, because rather than the largest companies by market value having the biggest influence on performance, all the underlying names have the same impact. 

There are currently 26 equal weight ETFs, the first of which debuted back in 2011, themed around European ESG stocks, according to data from Morningstar Direct.  

Since 2021, more and more have launched each year with 2025 seeing a record eight come to market. And increasingly, they’re focused on one thing in particular: US tech, with half of 2025’s cohort dedicated to this area in particular.

And it’s not a coincidence. Last year saw investors fleeing for cover from what had been one of the best trades of the 21st century, a run of the mill US equity index ETF. This movement could be seen as a case study for why investors need to consider an active approach to their passive allocation.  

Passive investing over the past two decades 

At face value, this would appear to be counter intuitive, as any active fund manager will tell you why their investment approach is distinct from a tracker fund.

‘Tracker’ is a catchall term for buying a low-cost product, such as an ETF, which is generally designed to match the performance of a particular index or investment. 

An actively managed fund is on the other hand is run by a team of experts and typically holds a more concentrated pool of assets, sometimes as few as 30 or 40 or even less. These are selected based on the manager’s research and expertise backs to outperform the broader market and, in theory, deliver better total returns.

This is what investors pay a higher fee for. However, most active managers have struggled to outperform the benchmark over the past two decades. Since 2006 the S&P 500 has achieved a total return in sterling of almost 600%, while the MSCI All-Country World Index – of which the US accounts for around 50% – made 525%. The Investment Association’s Global fund sector has returned 360% since 2006.

The FTSE 100 made 291% over the same time period, according to data from FE Analytics.

A lot of the US’ success across the Atlantic was driven by only handful of companies, originally the FANNGS – Facebook (now Meta), Apple, Amazon, Netflix, and Google (Alphabet) – which evolved into today’s Magnificent 7 – with Meta, Alphabet, Amazon and Apple joined by Microsoft, Nvidia and Tesla.

These seven stocks make up around 33% of the S&P index, and in 2024 drove 65% of the returns. This concentration has meant that not being exposed to these specific names almost guaranteed you would underperform the benchmark. Hence why a cheap tracker fund was so appealing, since investors could get high returns without having to pay an active management fee. 

AJ Bell’s latest Manager versus Machine report found that 2025 was an “extremely poor year for active managers”, with just 29% beating a passive alternative.   

But, the tide has begun to turn and has challenged the ‘chuck it in US tracker and forget about it’ mentality.  

The changing tides in US equities 

Higher rates of inflation and interest rates along with a more volatile geopolitical backdrop have had a major impact on markets the past couple of years, but US tech in particular has become one of the biggest sources of portfolio volatility. 

Sticking with the Mag 7, when US President Donald Trump launched his now infamous ‘Liberation Day’ tariffs back in April, the S&P 500 fell by 4.8% on the day, with this cohort losing 6.7%, which equated to $5 trillion being wiped off the market in one fell swoop. 

The event caused the VIX index – the so-called ‘fear gauge’ of Wall Street – to hit its third highest point on record (45), only beaten by the pandemic and 2008 global financial crash, respectively.   

And while short term events, such Liberation Day or the escalating conflict between the Iran-US-Israel are not things to make knee jerk reactions to, the fact that markets are increasingly volatile does make a case for a more deliberate approach to diversifying a portfolio. 

In a bid to take cover from these incredibly heavy drops, there has been a broad push to get US exposure via equal weighted ETFs as a way to help alleviate the concentration risk factor.   

Important things to consider 

But while this is one step towards taking a more deliberate view about investing in passives, they are not without their drawbacks. 

For example, if you had bought into one around Liberation Day you would have missed out on the Mag 7’s re-rating in the latter half of the year.   

Terry McGivern, a senior research analyst at AJ Bell who heads up passive fund selection on the Investments team, explained that there is a level of bravery in moving into equal weight, especially when it comes to the US. This is because any decision to move away from traditional market cap weighting means you’re taking a position that the wider market is incorrectly pricing and weighting the companies in the standard index.  

You’re also routinely selling your winners and buying recent losers, to maintain that equal weight position, which is an anti-momentum approach, and that can be an issue when momentum has historically been one of the most well rewarded risk factors in financial markets. 

“It’s not a panacea, and investors need to be aware of the contrarian position they’re taking, when using an equal weight approach,” McGivern explains. 

AJ Bell’s investment team increased its US exposure in the latest portfolio rebalance but this was done in a very deliberate way, through introducing sector trackers covering healthcare, energy and utilities.  

McGivern said that the team tend to use sector and thematic products more as satellite holdings; essentially bolt on exposures to the main regional investment pots rather than standalone pieces of the core investment thesis. 

Investment decisions should always be made with a significant amount of care and consideration, it’s just that now, perhaps more than in recent years, investors need to ask themselves a few more questions when it comes to investing passively.

Listen for more

You can access the free AJ Bell Money & Markets Deep Dive podcast in the usual podcast places. It looks at a range of investment topics in detail including active versus passive investing.