News and Commentary

Active or Passive? Is there a correct answer? By Shane Phillips, CFA, CAIA, CFP®

Ever since the creation of the first investable index fund in 1975, investors have debated whether it is better to invest in actively or passively managed investments. Is one superior to the other? Not necessarily. Should you utilize one over the other? Probably not.

With passively managed investments, your money is automatically put into securities that match or track to a specific index based on the percentage of those securities’ weighted market capitalizations within the index. Investment performance generally mirrors the selected index. Conversely, actively managed investments, which are more challenging for setting return expectations, involve the participation of portfolio managers or a team of managers who select the specific securities in which to invest.

For example, a passive investment in an index fund that mirrors the S&P 500 index can be allocated to all 500 companies in the S&P according to their weighting. Investors can expect to yield returns similar to the index minus a management fee. With an actively managed investment in large-cap U.S. stocks like those in the S&P 500, a portfolio manager would hand-select the specific companies in which to invest, including those in and not in the S&P 500 index.

Investors can expect passive strategies to have lower fees and strive to be more tax efficient than active strategies because the former do not involve the management of professional advisors, nor do they typically involve frequent trading activity. However, these elements alone should not be the deciding factor when choosing an investment style. Consideration of asset class, performance and an investor’s time horizon should also weigh heavily in the active/passive debate.

 Asset Class

From an asset-class perspective, Provenance Wealth Advisors is typically more open to passive management in our equity allocations than in our fixed-income allocation. Passive equity investment weightings are often based upon a company’s market capitalization, or its share price multiplied by the number of shares available, to create an investable fund. For example, Apple represents the largest holding in the S&P 500 index because its market capitalization is the largest of all the companies in the index.

On the other hand, most options for passive, fixed-income investments are based on the amount of debt a company issues. The more debt a company has, the larger its position will be in the fixed-income index. This philosophy of investing more assets in a company solely because it issued more debt goes against common sense and is the main reason we prefer active management in the fixed-income space. Additionally, the fees for actively managed fixed-income investments are usually substantially lower than those for active equity investments, making the fee gap less substantial.

Inside the equity allocation, we view areas of the market that are less efficient as being more attractive for active management. Less efficient markets can be geographic, such as emerging and international markets being less efficient than U.S. markets, or by size, with small cap stocks being less efficient than large cap. Less efficient markets typically garner less attention from investors and have larger differences between them, thereby creating potentially more opportunities to outperform expectations. For example, emerging markets banks in Brazil and China will look very different than banks in the U.S., where they will likely be more similar.


In recent years, countless advertisements have promoted the false concept that actively managed funds cannot outperform index funds due to manager fees. Before considering this claim, you should ask what performance means to you. While some investors focus on the rate of return, others are more concerned with the risk/return trade-off an investment offers. Risk or market volatility matters because if an investment takes an investor on a roller coaster ride of ups and downs, the resulting euphoria or stress could influence their decision to stick to a pre-determined investment plan. An investment plan typically works best when investors adhere to it and refrain from jumping in and out of the market, which can play a big part in the investment’s performance.

Secondly, assuming that all actively managed funds are alike is unreasonable. Instead, financial advisors select investment funds based on a labor-intensive due diligence process that weighs different variables, including manager experience, investment philosophy and historical track record. Their research dictates the top managers in a specific investment area.

Time Horizon

It is often said that investors should be in actively managed funds for a complete market cycle, or a minimum of three to five years, to help achieve the results of the fund manager’s investment style. The fact is that a manager could have a mix of good and bad years. Therefore, investors with time horizons as short as one to two years may be better served to invest in passively managed investments to obtain general asset class performance. By doing so, they may potentially avoid the risk of being invested in an active manager’s down years and having to sell before their investments recover.

The active/passive debate is expected to continue for the foreseeable future. Before making any decision, consider all the elements outlined above. A strong portfolio should involve the evaluation of the entire universe of investment choices designed to meet your goals.


About the Author: Shane Phillips, CFA, CAIA, CFP®, is a senior portfolio manager and financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or

 Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.

 Shane Phillips, CFA, CAIA, CFP®, is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.

 This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.

 * Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

Diversification and asset allocation do not ensure a profit or protect against a loss. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall, and when interest rates fall, bond prices generally rise. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.

 An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

 Investors should consider their investment objectives, risks, charges and expenses of an investment company carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus is available from your investment professional.

 * Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

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Posted on February 15, 2024