Stocks typically post strong gains across the board during bull markets1. However, the volatile market conditions of recent years have prompted many investors to reconsider funds whose managers select securities based on specific factors, such as company fundamentals or industry outlook. These funds are also known as actively managed funds.
Index Fund Managers vs. Active Managers
Index fund managers buy the same holdings of a particular index in order to mirror its performance. They believe markets are absolutely efficient and that current share prices always reflect all relevant information about a stock.
Active managers believe markets are not absolutely efficient. They use analytic or forecasting tools in an attempt to add value. Sometimes, they select securities based on information that is not necessarily known by the broader market (ex: the experience of a company’s management team). Since index funds require less management, they generally charge lower fees than actively managed funds.*
The Appeal of Active Funds
A unique strategy that may be the key to seeking the results you’re looking for in today’s uncertain Financial Markets. Index funds should always meet their benchmark’s return minus any fees, but they may not be able to protect your investment in the event of a market downturn.
In contrast, active fund managers have the flexibility to adjust their portfolios in response to changes in a specific company, overall market or economy. The manager can move money among different markets and asset classes to potentially reduce the impact of volatility2.
The Best of Active and Passive Market Strategies
Fortunately, you don’t need to resolve the debate over active and passive strategies — or choose just one. While index funds may still make sense as core investments in your portfolio, including actively managed funds might allow you to diversify2 your holdings to potentially protect against loss. As with all investments, it’s important to make your selections carefully, based on your individual needs and goals3.
To learn more about passive and active market strategies, contact a Fifth Third financial advisor.