Summary
Compare indexing and active management and decide which one—or which combination—is right for you.
Index funds vs. actively managed funds

What’s the difference between index and active funds?
Index mutual funds & ETFs
Index funds are designed to keep pace with market returns because they try to mirror certain market segments.
Actively managed funds
Active funds try to beat market returns with investments hand-picked by professional money managers.
Compare indexing & active management
Each strategy has a unique method for selecting its underlying investments. And each can complement the other when combined in a well-diversified, balanced portfolio.
Index mutual fund or ETF | Actively managed fund | |
Goal | Tries to match the performance of a specific market benchmark (or "index") as closely as possible. | Tries to outperform its benchmark. |
Strategy | Buys all (or a representative sample) of the stocks or bonds in the index it's tracking. | Uses the portfolio manager's deep research and expertise to hand-select stocks or bonds for the fund. |
Risk | Aligns directly to the risks involved with the specific stock or bond market the fund tracks. | Adds the risk that the portfolio manager may underperform its benchmark. |
Tax efficiency | Usually distributes fewer taxable capital gains because the portfolio manager trades less frequently. | Could have more taxable capital gains because the portfolio manager may trade more often, making it more tax-efficient to hold actively managed funds in IRAs. |
Index mutual fund or ETF
Goal
Tries to match the performance of a specific market benchmark (or "index") as closely as possible.
Strategy
Buys all (or a representative sample) of the stocks or bonds in the index it's tracking.
Risk
Aligns directly to the risks involved with the specific stock or bond market the fund tracks.
Tax efficiency
Usually distributes fewer taxable capital gains because the portfolio manager trades less frequently.
Actively managed fund
Goal
Tries to outperform its benchmark.
Strategy
Uses the portfolio manager's deep research and expertise to hand-select stocks or bonds for the fund.
Risk
Adds the risk that the portfolio manager may underperform its benchmark.
Active management performance history
Tax efficiency
Could have more taxable capital gains because the portfolio manager may trade more often, making it more tax-efficient to hold actively managed funds in IRAs.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Fluctuations in the financial markets and other factors may cause declines in the value of your account. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.