Question

What is the difference between Index Funds vs. Managed Funds?

Answer 1

Index funds are seen as being managed passively. An index fund manager attempts to mimic the returns of the index that follows by buying all (or nearly all) of the holdings in the index. One can invest in hundreds of market indexes via mutual funds and exchange-traded funds.

An active-managed fund's portfolio manager aims to beat the market by choosing and selecting stocks. In an attempt to outperform the market benchmark, like the S&P 500, the investor conducts an in-depth study of other assets.

When compared to index funds, active-managed funds start at a disadvantage. An active-managed fund's overall continuing investment expense costs 1 per cent more than its actively managed equivalent. The cost problem is one reason why their index is underperformed by the actively managed funds.

Another problem, which is not expressed in fund return figures, is that an active-managed fund's portfolio manager — who is searching for extra gains — buys and sells shares more often than an index fund. This purchase and sale of stocks by the active manager — known as turnover, results in taxable capital gains for the shareholders of the fund, provided that the fund is owned in a non-retirement account.