The debate between passive and active investing is one of the most studied questions in finance. Passive investing (index funds and ETFs tracking market indices) versus active investing (fund managers attempting to beat the market) has a clear body of evidence — and the results consistently favour passive investing for most investors, most of the time.
What Is Passive Investing?
Passive investing means holding a portfolio designed to replicate a market index — not attempting to beat it. You own all (or a representative sample of) the securities in an index.
- VAS (Vanguard Australian Shares ETF) tracks the S&P/ASX 300 — it holds the largest 300 Australian companies in proportion to their market capitalisation
- VGS tracks the MSCI World ex-Australia Index — over 1,500 global companies
- No fund manager is making buy/sell decisions — the portfolio reflects the index mechanically
Passive investing goal: Capture market returns, minus low fees.
What Is Active Investing?
Active investing means a fund manager (or you, directly) selects specific securities attempting to outperform the market benchmark.
- Active fund managers research companies, analyse financial statements, and make buy/sell decisions
- They charge significantly higher fees (typically 0.5–1.5%/year in management expense ratios) for this service
- The goal is to beat the index after fees
The Evidence: What the Data Shows
The SPIVA Australia Scorecard (S&P Indices Versus Active) is published semi-annually and tracks what percentage of active Australian fund managers underperform their benchmark index:
5-year SPIVA results (illustrative of consistent long-term findings):
- ~70–80% of actively managed Australian share funds underperform the S&P/ASX 200 over 5 years (after fees)
- ~80–90% underperform over 15 years
The longer the period, the fewer active managers survive and outperform. This is because:
- Higher fees compound against returns over time
- Markets are reasonably efficient — exploiting mispricings consistently is very difficult
- Survivorship bias: poorly performing funds are closed and removed from records
Fee Comparison: The Mathematical Reality
| Investment type | Typical MER | $100,000 portfolio cost |
|---|---|---|
| Passive ETF (VAS) | 0.07% | $70/year |
| Passive ETF (VGS) | 0.18% | $180/year |
| Retail active fund | 0.80–1.50% | $800–$1,500/year |
| Active fund (with entry/exit fees) | 1.00–2.00%+ | $1,000–$2,000+/year |
An active fund must outperform a passive ETF by its full fee difference just to match the passive return — before it generates any value. At 1% higher fees, an active fund needs to beat the index by 1%+ after all fees every year just to break even.
Compounded over 20 years, a 1% fee difference on $100,000 results in approximately $60,000 less in final portfolio value.
When Active Management May Add Value
Active management may be more appropriate in:
- Less efficient markets: Small caps, emerging markets, private equity — where less information is available and mispricings may be larger
- Alternative strategies: Market-neutral, absolute return, or factor-based approaches that genuinely differ from index exposure
- Specific skills: Some managers with genuine analytical edge may outperform over long periods (but identifying them in advance is very difficult)
For the core of an Australian investor’s portfolio (large-cap Australian shares, global developed markets), the evidence for passive ETFs is compelling.
The Pragmatic Middle Ground
Many Australian investors use a core-satellite approach:
- Core (80–90%): Low-cost passive ETFs for broad market exposure
- Satellite (10–20%): Active funds, individual shares, or alternative investments where you have specific views or want different exposure
This captures the efficiency and low cost of passive investing for most of the portfolio while allowing targeted active positions.
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Frequently Asked Questions
Do any active fund managers beat the index in Australia? Yes — some active managers do outperform over certain periods. The problem is that consistently identifying the managers who will outperform in the future is extremely difficult, and most outperformance disappears after fees. Past outperformance is not reliably predictive of future outperformance.
Is passive investing always better? Passive investing has been better than the average active fund for most investors over most long-term periods. However, “passive” encompasses many strategies — market-cap-weighted index ETFs, factor/smart beta ETFs, ESG-screened indices. The case for passive is strongest against high-fee active funds.
Should Australians use active or passive super funds? Most Australian industry super funds (AustralianSuper, Hostplus, Aware Super) use a mix of passive and internally-managed strategies at low overall cost — delivering strong long-run performance. High-fee retail active super options have generally underperformed industry funds over long periods. The ATO’s YourSuper comparison tool provides standardised performance data.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.