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Index funds vs. actively managed funds

The choice comes down to how much risk you're willing to take for the possibility of higher performance.

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.


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.


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, making it more tax-efficient to hold actively managed funds in IRAs.

Vanguard's proven track record for index & actively managed funds

Whatever your financial goals, you'll find that Vanguard investments deliver an enviable combination of quality and low costs.

Build your portfolio with our index mutual funds or tap into the expertise of the internal and external managers who oversee our actively managed mutual funds. You pay no transaction fees when you hold our funds in a Vanguard account, whether you trade online or by phone.*

Interested in Vanguard ETFs®? Most of our ETFs (exchange-traded funds) are indexed, and there are no commissions to buy or sell them in your Vanguard account. (Commission-free trading of Vanguard ETFs® applies to trades placed both online and by phone. Learn more about other conditions & costs that may apply.)

Competitive long-term performance

Overall, 85% 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.†

Open your account online

Explore all our funds for your investing needs

Our index funds

Choose from more than 100 Vanguard index funds representing nearly all U.S. and international stock and bond markets, as well as sector-specific market areas.

Our actively managed funds

Choose from 70 actively managed funds for the opportunity to beat the markets.

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

29% outperformed benchmarks.
71% underperformed benchmarks.


footnote*Sources: Vanguard calculations, using data from Lipper, a Thomson Reuters Company. Based on funds' excess returns relative to their prospectus benchmark for the 15-year period ended March 31, 2019. 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. 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.

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Portfolio

The total of all your investment holdings.

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Stocks

Usually refers to common stock, which is an investment that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.

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Bonds

A loan made to a corporation, government, or government agency in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date.

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Capital gains

An increase in the value of an investment over the initial purchase price. A capital gain is "unrealized" until the investment is sold, when it becomes a "realized" gain. Realized gains are taxable, but the tax burden is deferred if you hold the investment in an IRA or a 401(k).