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Index funds vs. actively managed funds

Which you choose comes down to how much risk you're willing to take to try to achieve higher performance.

The differences between 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.


Goal

INDEX MUTUAL FUND OR ETF

Tries to match the performance of a specific market benchmark (or "index") as closely as possible.

ACTIVELY MANAGED FUND

Tries to outperform its benchmark and peer-group average.


Strategy

INDEX MUTUAL FUND OR ETF

Buys all (or a representative sample) of the stocks or bonds in the index it's tracking.

ACTIVELY MANAGED FUND

Uses the portfolio manager's deep research and expertise to hand-select stocks or bonds for the fund.


Risk

INDEX MUTUAL FUND OR ETF

Aligns directly to the risks involved with the specific stock or bond market the fund tracks.

ACTIVELY MANAGED FUND

Adds the risk that the portfolio manager may underperform its benchmark.

Active management performance history


Tax efficiency

INDEX MUTUAL FUND OR ETF

Usually distributes fewer taxable capital gains because the portfolio manager trades less frequently.

ACTIVELY MANAGED FUND

Could have more taxable capital gains because the portfolio manager may trade more often.


Want more details?

INDEX MUTUAL FUND OR ETF
ACTIVELY MANAGED FUND

Vanguard's proven track record

Competitive long-term performance

84% of Vanguard mutual funds and ETFs performed better than their peer-group averages over the past 10 years.*

Low costs

The average Vanguard fund expense ratio is 83% less than the industry average.**

Better yet, you can buy any Vanguard mutual fund without a transaction fee, and every Vanguard ETF® is commission-free. (Commission-free trading of Vanguard ETFs® applies to trades placed both online and by phone. Learn more about other conditions & costs that may apply.)

Open your account online

Not all index funds are created equal

Our funds—like our company—are intentionally designed to make sure that when new economies of scale help us lower costs, those benefits are passed directly to you.

We're here to help

Have questions? Contact us

REFERENCE CONTENT

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Market benchmark

An unmanaged group of bonds or stocks whose overall performance is used as a standard to measure investment performance.

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Active management performance history

Over the past 15 years, only about 35% of active stock fund managers and 27% of active bond fund managers have outperformed their designated benchmarks.*

Active stock fund managers

35% outperformed benchmarks.
65% underperformed benchmarks.

Active bond fund managers

27% outperformed benchmarks.
73% underperformed benchmarks.


footnote*Sources: Vanguard calculations, using data from Morningstar, Inc. Based on funds' excess returns relative to their prospectus benchmark for the 15-year period ended December 31, 2018. Only funds with a minimum 15-year history were included in the comparison. Results for other periods will vary.

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ETF (exchange-traded fund)

ETFs—like mutual funds—are broadly diversified collections of individual stocks or bonds.

But while mutual funds are only priced at the end of each trading day, ETFs have real-time prices that change throughout the trading day.

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Other conditions & costs that may apply

Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. Commission-free trading of non-Vanguard ETFs applies only to trades placed online; most clients will pay a commission to buy or sell non-Vanguard ETFs by phone. It also excludes leveraged and inverse ETFs, which cannot be purchased through Vanguard but can be sold with a commission. Commission-free trading of non-Vanguard ETFs also excludes 401(k) participants using the Self-Directed Brokerage Option; see your plan's current commission schedule. Vanguard Brokerage reserves the right to change the non-Vanguard ETFs included in these offers at any time. All ETFs are subject to management fees and expenses; refer to each ETF's prospectus for more information. Account service fees may also apply. All ETF sales are subject to a securities transaction fee. See the Vanguard Brokerage Services commission and fee schedules for full details.