Passive Management

Reviewed by Sujaini | Updated on Aug 27, 2020

What is Passive Management?

Passive management is a management style associated with mutual and exchange-traded funds (ETF), in which the portfolio of a fund reflects a market list. Passive management is the contrast of active management, in which the manager(s) of a fund attempt to beat the market with different investment strategies and purchase/sell securities decisions. Passive management is also known as "passive policy," "passive spending," or "spending by index."

Breaking Down Passive Management

Passive management adherents believe in the idea of an efficient business. It states that markets incorporate all information and reflect it at all times, making individual stock picking futile. Consequently, the safest investment approach is to invest in index funds that have consistently outperformed other actively managed funds.

Passive vs Active Portfolio Management

Investors have two main investment strategies for generating a return on their investment accounts: active portfolio management and passive portfolio management.

  • In comparison to a specific benchmark like the Standard & Poor's 500 Index, active portfolio management focuses on outperforming the market.
  • To produce comparable outcomes, passive portfolio management mimics the investment assets of a single index.

As the names imply, in general, active portfolio management involves more frequent trades than passive management. An investor may use a portfolio manager to conduct either strategy or as an individual investor may follow either approach.