First, some basic definitions. Passive investing involves following market benchmarks such as the S&P 500 and is usually associated with index funds and ETFs. The idea is to simply to track or mirror the market. Active investing typically involves a human portfolio manager using market timing, stock picking or other techniques in an effort to beat or outperform the market. Passive index investing has surged in popularity in recent years. There are several reasons for this. Investors have focused more on fees, and index investing is associated with very low costs. Also, academic research has documented how difficult it is to beat the market over the long haul.
A PR nightmare?
Active mutual fund managers have been dealt "a public relations thrashing," writes John Rekenthaler, vice president of research at Morningstar. "Index-fund managers have convinced the marketplace that the critical investment issue is whether to be passive or active," he said. "The triumph of indexing has become a familiar tale … Active management is regarded as a losers’ game. That belief, however, is incomplete."Rekenthaler, a long-time observer of the mutual-fund industry, notes that costs count more than active or passive. Low-cost investing is good investing, but not all low-cost investing is passive.