Active vs Passive - A closer look

Updated: Aug 4

Another important topic in the ETF investing space is understanding the differences between the passive and active versions of ETFs. There are a variety of differences between active and passive ETFs and if investors buy into them blindly, without understanding at least some of the differences, they could be exposing themselves to unintended risks.

Disclaimer: This article does not advocate for one type over the other. They both have their benefits and can coexist within a portfolio. For any sort of investing advice, please do your own homework and consult with a financial adviser if you have one.

What is an Active vs Passive ETF?

The most common ETFs are passive and they are constructed to follow an index. The holdings within these ETF portfolios are updated at regular intervals (e.g. quarterly) and they also tend to follow buy-and-hold trading strategies as they seek to replicate the returns of the indices they follow. Active ETFs, as the name implies, have fund managers at ETF issuers who actively manage the composition changes of these ETFs.

What are some of the differences?

Passive outperforms Active but not everywhere

Whilst it’s typically cited that passive outperforms active investing, it’s not true for every fund manager and it’s also not true for all sector types. The ASX distinguishes between funds which are index-tracking and those which are not. Using this information along with the knowledge that all Chi-X funds are actively managed we can compare performance. As we can see below, there are ETF categories where non-index tracking ETFs have outperformed when we look at monthly returns going back to 2019. The past performance does not guarantee future returns but it is worth comparing.

Note: the groups shown here are a consolidation of the listed ETF categories shown by the ASX and Chi-X where the various Australian ETF categories (e.g. Australia, Australia Sectors, Australia Small/Mid cap) are grouped into 1 larger sector. For the purpose of timing for this article, a baseline level of growth was not added but analysis of this nature can be added in future articles.