How Can I Determine if a Fund Follows a “Passive” Strategy?

Heidi wrote to me with a question regarding active vs. passive investing fund performance and asked for some clarification.

How can I determine whether my Vanguard funds are passive investments?

Hi Heidi! Thank you for asking such an important basic that I hadn’t covered on 20somethingfinance before – an excellent opportunity for back-to-basics teaching moments and discussions! Thanks so much for asking this great question.

To give an appropriate response, it is helpful to first define what “active” and “passive” fund management actually are.

What Is Active Fund Management? mes Mutual funds that employ active fund management refers to mutual funds where an investment manager or multiple managers make subjective buying and selling decisions on what stocks and bonds to buy for the fund, in order to generate the maximum return. Basically, this means they own what they want when they want it, in hopes of selecting investments with maximum ROI potential and selling what they don’t like when necessary.

As part of their service, actively managed funds usually charge higher management fees (expense ratios). This compensation strategy covers their investment team.

What Is Passive Fund Management? Passive management refers to index funds or ETFs (exchange traded funds) not actively managed by an active fund manager who makes subjective buying and selling decisions on stocks/bonds for inclusion into the fund they manage.