Passive management

Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio. Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds. There has been a substantial increase in passive investing over the last twenty years. 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. The bulk of money in passive index funds are invested with the three passive asset managers: BlackRock, Vanguard and State Street. A major shift from assets to passive investments has taken place since 2008. Passively managed funds consistently outperform actively managed funds. More than three-quarters of active mutual fund managers are falling behind the S&P 500 and the Dow Jones Industrial Average.