Active or Passive Management: Which Is Better?

Updated on 28 July 2026

For most retail investors, passive ETF management proves more profitable than active management over the long run: most active funds underperform their benchmark once fees are deducted. This article compares the two approaches, backed by fees and performance data, to help you decide.

Key takeaways

• Over five years, about three in four active US funds underperform their benchmark once fees are deducted (SPIVA, end of 2024).
• Fees explain a large part of the gap: an active fund can stack entry fees, high management fees and a performance commission, where an ETF charges much lower fees.
• The more assets an active manager gathers, the harder it becomes to stay agile and beat the market consistently.
• Holding ETFs via a PEA or life insurance policy can reduce the tax on long-term capital gains.

Should you invest in the stock market through ETFs in 2026? On this question, two schools of thought have clashed for over 50 years: active management and passive management (ETFs). Yet one is far more profitable than the other for your wealth management. Read on for our unequivocal verdict.

Two camps, two philosophies

Active funds are led by a star manager whose job is to beat the benchmark and generate alpha for clients. These funds are marketed by asset managers who run colossal sums of money. But they are not the only ones on this path: when you buy individual shares, you are also doing active management without realising it.

ETFs follow the opposite philosophy: they start from the premise that markets are efficient, and so aim solely to replicate the performance of their benchmark index. The first ETF was launched in 1993 by State Street, based on an idea by Nathan Most. Index management itself had already been popularised in the 1970s by John C. Bogle, founder of Vanguard, today one of the largest asset managers in the world with over $11 trillion in assets under management (as of 30 September 2025). Investors mainly buy them through ETFs, which have the advantage of being (relatively) liquid, continuously listed and therefore relatively easy to trade. For example, a real estate ETF lets you invest in an index made up of numerous companies in the sector.

Does an active fund outperform an ETF?

Over time, rarely: once fees are deducted, most active funds fail to beat their benchmark, and therefore the ETF that replicates it. To better understand the difference between these two philosophies, let’s look at two funds that track the same benchmark, the MSCI World: Carmignac Portfolio Investissement (active management) and a Lyxor MSCI World ETF (ETF).

So what about performance? Over short periods, an active fund like Carmignac can beat its benchmark, and therefore the ETF that replicates it. But this outperformance is rarely lasting: an investment strategy is really judged over the long term.

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Which strategy is more profitable for you?

To settle the question, let’s look at the historical performance of these two fund types and compare them. I won’t beat around the bush: ETFs are far more profitable. Over a five-year horizon (to the end of 2024), around 76% of large-cap US equity funds underperformed the S&P 500, according to the SPIVA U.S. Scorecard from S&P Dow Jones Indices. The same holds true over different time horizons or geographies (Europe, Asia, etc.).

There are several reasons for this shortfall:

• Markets are unpredictable : Do you know anyone who predicted COVID in 2019? To beat the benchmark consistently, you would need to become Nostradamus, with the ability to predict the future without a break for years on end. Over the long run, manager performance is almost entirely random.
• Fees : Look at the fee gap between Carmignac’s active fund and the Lyxor ETF. That gap means that to beat their benchmark and be more profitable than a passive fund, active funds must outperform the market by at least that much. What’s more, because they trade positions, they carry significant transaction costs, which also drag on performance. “Performance comes and goes, expenses are forever”.
• Assets under management : Managers who beat their benchmark every year have a luxury problem: they attract a lot of new investors. The better they are, the more their assets under management balloon. They end up having to deploy larger and larger sums, which limits their options. Indeed, when managers buy or sell securities, their massive orders move the markets, and they end up overpaying (or underselling) their positions. It can even stop them from buying certain stocks whose market capitalisation is too small, depriving them of opportunities. In short, they become giants with feet of clay.

A matter of probability

If you decide to invest in an active fund, you have about a three-in-four chance of picking one that will do worse than its benchmark. So next time you see a fund bragging about its absolute performance, look at its relative performance. It’s easy to be up 20% when your benchmark was up 30% over the same period. When the tide rises, all the boats rise with it…

Going back to our Carmignac fund, nothing guarantees it will keep beating its benchmark. If you want to invest in a given market, the simplest option is to buy an ETF that replicates its benchmark index, ideally via your PEA or life insurance policy to reduce the tax on capital gains. Apps like Finary also let you track your ETF portfolio’s performance in one place, across all brokers. Oddly enough, many wealth advisers push you towards active management. Why? They collect a share of the very high fees you will pay. Passive management doesn’t interest them because it is low-cost, and nobody pays commissions on it. Steer clear of these advisers.

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Frequently asked questions

Is passive management always better than active management?

Over the long term, passive management wins out more often than not: about three in four large-cap US active funds underperformed the S&P 500 over five years (SPIVA, end of 2024). Some managers do beat their benchmark, but rarely for long.

Can you hold ETFs in a PEA or a life insurance policy?

Yes. Many European-equity or synthetically-replicated ETFs are eligible for a PEA, and most life insurance contracts offer ETFs as unit-linked funds. These wrappers can reduce the tax on capital gains after a few years of holding.

Why do active funds cost more than ETFs?

Active funds pay a team of managers and analysts, often charge entry fees and a performance commission, and bear high transaction costs. An ETF simply replicates an index, which sharply reduces its management fees.

Does an ETF carry a risk of capital loss?

Yes. An ETF tracks its index both up and down: if the markets fall, its value decreases. Investing in equity ETFs carries a risk of capital loss, and past performance is not a reliable indicator of future performance.

Sources

S&P Dow Jones Indices, SPIVA U.S. Scorecard: active fund performance vs. indices

State Street, history of the first ETF (SPY, Nathan Most, 1993)

ADV Ratings, Vanguard assets under management

Carmignac Portfolio Investissement, fees and characteristics (KID)

JustETF, Amundi MSCI World V UCITS ETF (ex-Lyxor)

Amundi, effective merger of the Lyxor entities