Financial Glossary: Passive Management


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Passive Management

Passive Management

A style of management associated with mutual and Exchange-traded funds (ETF) where a fund's Portfolio mirrors a market index.

Passive management is the opposite of Active Management in which a fund's manager(s) attempt to beat the market with various investing strategies and buying/selling decisions of a Portfolio's securities.

Also known as "passive strategy," "passive investing" or "index investing." 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. Today, there is a plethora of market indexes in the world, and thousands of different index funds tracking many of them.

One of the largest Equity mutual funds, the Vanguard 500, is a passive management fund. The two firms with the largest amounts of money under management, Barclays Global Investors and State Street Corp., primarily engage in passive

Followers of passive management believe in the efficient market hypothesis. It states that at all times markets incorporate and reflect all information, rendering individual stock picking futile. As a result, the best investing strategy is to invest in index funds, which, historically, have outperformed the majority of actively managed funds.

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