Active vs. passive ETFs

Rules-based index tracking versus a manager's judgment — costs, predictability, and trade-offs.

A passive ETF follows an index: its holdings are determined by published rules, and success is measured by how closely it tracks. An active ETF gives a portfolio team discretion to pick holdings, aiming to beat a benchmark or deliver an outcome (income, lower volatility) an index cannot.

Passive funds are typically cheaper and highly predictable — you always know roughly what you own. Active funds charge more and their results depend on the team; decades of evidence show most active managers in liquid markets trail cheap index funds after fees over long periods, though some strategies (niche bonds, option income) are inherently active.

The ETF wrapper has made active management more transparent: most active ETFs disclose holdings daily, and their fees, while higher than index funds, are usually below traditional active mutual funds.