Mutual funds and ETFs are pooled investments that are managed by a “fund manager”, meaning that the fund manager decides what investments are bought and sold within the fund in order to accomplish the fund’s goal.
Passive management usually involves creating a fund that just tracks the price of a commodity or index. Passively managed funds usually have a low turnover ratio and as a result, should have a lower expense ratio as less time is going into managing the fund.
Active management involves a higher turnover ratio and as a result, should have a higher expense ratio, being that more time is going into managing the fund. Active managers are usually trying to beat a benchmark or index.
Pro Tip: Passive management is usually tough to beat in spaces that are very public and accessible, like large-cap US stocks. Active managers have a better chance of outperforming passive management in spaces where companies are smaller or tougher to research, given that the active manager has expertise in the space to pick solid companies.
