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Choose by comparing what a fund owns, what it aims to do, and what it costs—not by the words “FTSE,” “index,” or “active” alone. An index fund seeks to track a specified benchmark; an actively managed fund gives its manager discretion to select investments in pursuit of an objective, often outperforming a benchmark. Neither approach is automatically better, cheaper, or less risky for every investor.
What is the difference between an index fund and an active fund?
An index is a hypothetical portfolio designed to represent a market or segment, not an investment product you can buy directly. As FTSE Russell explains, “An index is a hypothetical basket of stocks, so it cannot be invested in directly.” A fund issuer licenses an index and creates a fund or ETF intended to track it; the issuer, rather than FTSE Russell, manages and distributes that product. FTSE Russell’s education centre and its index-linked products resources describe this distinction.
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Index-tracking funds
An index-tracking fund aims to follow a defined benchmark according to its rules. “Passive” describes the fund’s investment approach, not an absence of decisions: the index provider establishes the benchmark’s rules, while the fund must decide how to implement them. A tracker may hold every constituent or use sampling, holding a representative subset. The result is intended to resemble the index, but it need not match it exactly.
Actively managed funds
An active fund’s manager chooses investments using the fund’s stated objective and strategy. That may include trying to beat a benchmark, but the objective and benchmark vary by fund. Active management does not guarantee outperformance; it means the portfolio is not simply being assembled to track an index.
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Why the benchmark matters as much as the management style
“FTSE” identifies an index provider, not a complete description of a fund’s exposure. FTSE Russell indexes can represent different markets, regions, company sizes, styles, and securities. Two funds that both track FTSE Russell indexes may therefore hold substantially different portfolios, and an active fund should be compared with a benchmark that reflects its actual investment universe.
Before comparing performance, identify the fund’s named benchmark and check what it covers. Review the index’s methodology, constituent eligibility, weighting rules, concentration, and rebalance schedule, then compare those features with the fund’s actual holdings. FTSE Russell highlights representativeness, transparent rules, investability, and cost efficiency as considerations in index construction; changes in constituents or weights can also create trading costs. See FTSE Russell’s index resources for methodology materials.
Index schedules can change and apply only to the relevant index family. For example, FTSE Russell’s Russell U.S. index page says reconstitution moves from annual to semiannual in 2026. That schedule should not be generalized to other FTSE Russell indexes; check the current methodology and announcements for the specific benchmark.
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How to compare costs fairly
Compare the costs of the actual fund share class you could buy, not just the broad labels “index” and “active.” An expense ratio is an important ongoing charge, but it may not capture every cost. Depending on the fund and account, also look for transaction fees, sales loads, and trading costs. The U.S. SEC explains the impact of fund charges in its guide to how fees and expenses affect an investment portfolio.
Index funds can avoid some research and security-selection expenses, but that does not establish that every index fund is cheaper than every active fund. Compare the published charges and relevant trading costs for the funds available to you. Fees reduce the amount of an investment that remains invested and can affect returns over time.
Can an index fund underperform its index?
Yes. A fund’s return can differ from its benchmark because of fees and expenses, trading costs, sampling, and tracking error. The SEC’s Investor.gov guide to index funds puts it plainly: “An index fund may underperform its index because of fees and expenses, trading costs, and tracking error.”
When assessing a tracker, look at tracking difference—the gap between the fund’s return and the index’s return over the same period—and the fund’s own returns after fees. Do not treat the index’s headline return as if it were the return an investor would have received from the fund. For an active fund, compare its net-of-fee returns with a suitable benchmark over multiple relevant periods.
What performance evidence can—and cannot—tell you
S&P Dow Jones Indices reported that 79% of active large-cap U.S. equity mutual funds underperformed the S&P 500 in the one-year period ending in 2025, in its SPIVA U.S. Scorecard Year-End 2025. This is a specific result for U.S. large-cap mutual funds against the S&P 500 over that period; it is not a statistic about all active funds, other countries, or every time horizon.
A historical scorecard is context, not a forecast that index funds will outperform in the future. Nor does it show that every index fund tracks its index perfectly. Interpret performance alongside the fund’s benchmark, fees, tracking results, and investment period.
A practical checklist for choosing between funds
- Define the exposure you want. Identify the market, geography, company size, style, and asset class that fit your plan.
- Read each fund’s objective and benchmark. Confirm whether it tracks a named index or follows an active strategy, and whether the benchmark is a fair comparison for the portfolio.
- Inspect index rules and fund holdings. Check methodology, concentration, constituent rules, rebalance schedule, and the fund’s actual implementation.
- Compare total costs for the share class available to you. Include the expense ratio and any applicable loads, transaction fees, or trading costs.
- Compare returns on an equivalent basis. Use fund returns after fees and a relevant benchmark over multiple periods; for a tracker, examine tracking difference.
- Assess portfolio risk and fit. Consider diversification, concentration, volatility, liquidity, taxes, account type, and whether you could tolerate losses.
Product structures, taxes, investor protections, share classes, fees, and availability depend on country and account. The examples above use U.S. SEC guidance and a U.S. SPIVA scorecard; they do not determine which fund is suitable for a particular person. A fund’s name or management label alone is not enough to make that decision.
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