With the number of available funds seemingly endless, it can be hard to tell what a fund’s investing strategy is. With so many ways to differentiate funds, it can be very daunting for investors to determine which fund is right for them. This article will discuss one of, if not the most important, ways to differentiate funds. Active management styles and passive management styles are key differentiators of funds and can be the difference between average and superb returns.
Actively Managed Funds
Actively managed funds are funds in which the portfolio management team actively trades the held positions within the fund portfolio in an attempt to outperform a specific index, such as the S&P 500, MSCI EIFA, Russell 2000, etc. Specific securities are traded based on expected performance. Different funds have their own ways of determining the best way to select funds, which is what separates actively managed funds from each other.
The most important thing to remember about actively traded funds is that there is not one that will outperform the market 100% of the time. If there were, that would be the only fund because every investor would be in it. This is why choosing the best actively managed fund becomes so essential. Investors want funds that will outperform the market most of the time and don’t get beat by the market by too much if it underperforms the market. This is also why diversification is important within an investor’s portfolio. If you are only in one fund and it is underperforming the market, then your entire portfolio is underperforming the market. If you were in multiple funds, and only one was underperforming, your whole portfolio could still outperform the market.
Passively Managed Funds
Passively managed funds do not seek to outperform the market but rather to mirror the performance of it. Passively managed funds choose an index, invest in funds to mirror that index, and seek to mirror the performance of it. With passively managed funds, it is not likely that the fund will outperform the index, but it is also not likely to underperform it. Passively managed funds are often referred to as “buying the market” because they have such a similar performance to it. There is little human interference with these funds, as the investing within them is typically automated to match a specified index.
What’s The Difference?
Although passively managed funds typically won’t underperform the market, it should also be recognized that they also won’t usually outperform the market either. You will get a good return in a passively managed fund when the market is doing well, but countless actively managed funds are getting an even better return during that time period. That said, just as many, if not more, funds are getting a worse return than the market. It is very easy to choose funds that will offer a lower return than the market offers, sometimes even losing while the market gains. This is why proper research and fund selection are essential with actively managed funds. At Whitaker-Myers Wealth Managers, we take pride in being a fiduciary and believe in picking the funds that best fit your financial goals. Talk to your advisor today if you have questions about what kind of funds you are set up with; if you don’t have an advisor, we have a whole team of financial advisors ready to help answer your questions.
Actively Managed vs. Passively Managed Funds
September 30, 2024
David Gearhart
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