Investing term

What is Active fund?

A fund whose manager picks stocks in the hope of beating a benchmark.

An active fund employs a manager (and team) who pick which stocks or bonds to hold, aiming to beat a benchmark index. You pay for that effort through a higher expense ratio. The catch, shown repeatedly in long-run studies, is that most active funds fail to beat their index after fees — the higher cost is a guaranteed drag, the outperformance is not.

For example

An active fund charging 0.9% a year must beat its index by 0.9% just to tie a cheap index fund charging 0.05% — a head start it has to overcome every single year.

Active fund is taught hands-on in Stage 6 — Index Funds, ETFs & Mutual Funds.

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Related terms

BenchmarkThe reference index a fund compares itself to — e.g. the S&P 500, MSCI World, or Bloomberg Aggregate.Creation/redemptionThe mechanism that keeps ETF prices close to NAV. Authorized participants swap baskets of underlying stocks for ETF shares (or vice versa).DistributionThe income a fund pays out to its shareholders — dividends from stocks held, plus realized capital gains.ETFExchange-Traded Fund — a basket of many stocks (or bonds) bundled into a single share that trades on an exchange like a regular stock.
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