There is a common misconception that mutual funds, index funds and ETFs are all the same type of investment vehicles. And while there are similarities, there are also some significant differences for investors to know about. Let’s explore.
Active vs. Passive
Investors can select from two main investment strategies: active and passive portfolio management. Active portfolio management is exactly how it sounds: the portfolio manager(s) focuses on outperforming an index by “actively” making buy/sell decisions, adjusting asset allocation ranges and employing other portfolio management techniques.
Passive portfolio management on the other hand simply aims to replicate an index – not to outperform and not to underperform – but rather replicate. Therefore, there is no portfolio manager making buy/sell decisions.
Mutual funds are either active or passive – if passive, then they are called index funds. ETFs can also be considered either passive or active.