Passive management

Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio. 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.

Passive management is most common on the , where index funds track a , but it is becoming more common in other investment types, including bonds, commodities and hedge funds.

One of the largest equity mutual funds, the Vanguard 500, is passively managed. The two firms with the largest amounts of money under management, BlackRock and State Street, primarily engage in passive management strategies.

The concept of passive management is counterintuitive to many investors. The rationale behind indexing stems from the following concepts of financial economics:

The bull market of the 1990s helped spur the growth in indexing observed over that decade. Investors were able to achieve desired absolute returns simply by investing in portfolios benchmarked to broad-based market indices such as the S&P 500, Russell 3000, and Wilshire 5000.

In the United States, indexed funds have outperformed the majority of active managers, especially as the fees they charge are very much lower than active managers. They are also able to have significantly greater after-tax returns.

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