Passive investing is following a market-weighted index without deviating from it to achieve extra returns (alpha). Investors thus obtain the index returns adjusted for costs.
In the case of active investing, trackers – also referred to as ETFs – are often selected. Investors use a tracker to follow a stock or bond index.
A passive approach has advantages and disadvantages. Passive investors enjoy low management costs and low trading activity, but this is accompanied by a major disadvantage. Using the passive approach, investments are also made in those segments of the market that are characterized by an unattractive risk-return ratio. Take high-volatility equities, for instance. In an active approach, investors can avoid these segments and focus on the attractive parts of the market.
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