Active investing means trying to beat the market — picking individual stocks or using fund managers who make frequent investment decisions to outperform a benchmark index. Passive investing means tracking an index (like the ASX 200 or S&P 500) at low cost, accepting market returns rather than trying to beat them. The evidence strongly favours passive investing for most retail investors over the long term.
What Is Active Investing?
Active investing involves making deliberate investment decisions to generate returns above the market average (alpha). This can be done by:
- An individual investor picking individual ASX stocks
- A fund manager running an actively managed fund
- Using algorithmic or quantitative strategies to time trades
The premise of active investing is that through research, analysis, and skill, you can consistently identify undervalued assets and outperform the index.
Common active strategies include:
- Stock picking — selecting individual companies expected to outperform
- Market timing — moving in and out of the market based on economic or technical signals
- Factor investing / smart beta — tilting toward characteristics like value, small-cap, or momentum
What Is Passive Investing?
Passive investing tracks a market index — buying every company in the index in proportion to its weight. No judgement is made about which companies are better than others. You simply own the entire market.
In Australia, passive investing typically means buying ETFs like:
- VAS / A200 — tracking the ASX 200 or ASX 300
- VGS — tracking international developed markets
- DHHF / VDHG — diversified global all-in-one ETFs
The defining feature of passive investing is low cost — ETF management fees (MER) typically range from 0.03% to 0.27% per year in Australia, versus 0.5–1.5%+ for actively managed funds.
What Does the Evidence Say?
The S&P Indices Versus Active Funds (SPIVA) scorecard — published by S&P Global — is the most widely cited dataset on active vs passive performance.
SPIVA Australia (10-year data, as at mid-2025):
- Approximately 80% of actively managed Australian equity funds underperformed the S&P/ASX 200 index over 10 years
- The underperformance is consistent across most time periods and categories
- After fees, even funds that outperform before fees frequently underperform net of costs
Why do active managers underperform?
- Fees — active funds charge more, and those fees compound over time
- The market is efficient — stock prices already reflect publicly available information, making consistent outperformance extremely difficult
- Survivorship bias — poorly performing active funds are closed or merged, so the historical track record of surviving funds looks better than reality
The Australian Fee Comparison
| Investment type | Typical MER (annual fee) |
|---|---|
| ASX 200 ETF (VAS, A200) | 0.03–0.07% |
| Global shares ETF (VGS) | 0.18% |
| All-in-one ETF (DHHF, VDHG) | 0.19–0.27% |
| Australian active managed fund | 0.5–1.5% |
| Small-cap active managed fund | 1.0–2.0% |
On a $100,000 portfolio, the difference between a 0.1% passive ETF and a 1.0% active managed fund is $900/year in fees. Over 20 years at 8% assumed growth, that fee difference compounds to approximately $50,000+ in lost wealth. Actual outcomes will vary.
When Active Investing Can Make Sense
Despite the evidence favouring passive investing on average, there are situations where active strategies may be worth considering:
- Less efficient markets — small-cap and emerging market indices may be less efficiently priced than large-cap markets, giving active managers slightly more opportunity
- Fixed income — some active bond management has historically added value through credit analysis and duration management
- Alternatives — private equity, infrastructure, and unlisted assets require active management by nature
- Tax optimisation — in certain circumstances, active loss harvesting and CGT management may add net returns
Even in these cases, the starting point should be evaluating the after-fee, after-tax performance record — not just the manager’s narrative.
What Most Australian Retail Investors Choose
The growth of ETF investing in Australia has been extraordinary. ETFS assets under management on the ASX exceeded $200 billion by 2025. Low-cost passive ETFs — particularly Vanguard and Betashares products — dominate retail investor portfolios, and for most people this is a well-evidenced approach.
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Frequently Asked Questions
Can an active investor beat the market consistently? Some do, but consistently identifying which active managers will outperform in advance is extremely difficult. Most research shows that past active fund outperformance is not a reliable indicator of future outperformance. The minority of managers who do consistently outperform often have access restricted to institutional investors.
Is buying individual ASX shares better than an ETF? Picking individual ASX shares concentrates your risk — if you hold 5 stocks and one collapses, it materially impacts your portfolio. ETFs that hold 200–300 companies mean no single failure is catastrophic. For most investors without deep research skills and time, broad ETFs are likely to outperform a hand-picked stock portfolio after adjusting for risk.
Do financial advisers recommend passive or active investing? Australian financial planning has shifted significantly toward passive, low-cost investing over the past decade. Many advisers now use model portfolios built predominantly from low-cost ETFs. Some advisers still use actively managed funds — it is worth asking any adviser to explain their investment philosophy and justify their fee structure.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.