Index funds vs active funds
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Quick answer: An index fund tries to match the performance of a market index, like the FTSE All-Share or the MSCI World, at very low cost.
An index fund tries to match the performance of a market index, like the FTSE All-Share or the MSCI World, at very low cost. An active fund has a manager who tries to beat the market by picking specific investments. Both have a place — but the long-running evidence is that most active funds, after fees, underperform their benchmark.
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Content updated: 3 min read
Primary source: www.spglobal.com/spdji/en/research-insights/spiva
How an index fund works
An index fund (or 'tracker') replicates an index — for example, the FTSE 100, the S&P 500 or the MSCI World — by holding the same companies in roughly the same proportions. There is no fund manager trying to outperform, so costs are very low.
Index funds come as 'open-ended' funds (priced once a day) or as exchange-traded funds (ETFs) that trade on the stock market like shares.
How an active fund works
An active fund's manager picks specific shares, bonds or other assets aiming to beat a benchmark. They might run a concentrated portfolio (a small number of high-conviction holdings) or a diversified one, focus on income, growth, value, or a theme like clean energy.
The higher cost (typically 0.5%–1.5% a year, sometimes plus performance fees) reflects the research team and trading costs.
What the evidence shows
SPIVA (S&P Indices Versus Active) is published twice a year. The SPIVA Europe Year-End 2025 scorecard found that over the 10 years to December 2025, between about 77% (UK small-cap) and 97% (global equity) of sterling-denominated active equity funds underperformed their benchmark, and more than 90% did so in most major categories. SPIVA counts funds that closed or merged during the period as underperformers, so survivorship bias does not flatter these figures.
There are managers who outperform over long periods. The challenge is identifying them in advance rather than after the event.
How to think about choosing
Many UK long-term investors build a core portfolio of low-cost global index funds, then add satellite positions — actively managed specialist funds, individual shares or investment trusts — if they want them. This is not advice; it is one common framework.
Whatever you choose, the FCA Consumer Duty requires firms to deliver fair value — fees should be justified by the service provided. If you are paying high active fees for a fund that closely tracks an index ('closet tracker'), that is a red flag.
Common questions
What about smart beta or factor funds?
These are rules-based funds — neither purely passive nor traditionally active. They tilt towards factors like value, quality, momentum or low volatility, normally at fees somewhere between index and active.
Are investment trusts active or passive?
The vast majority are actively managed and trade on the stock exchange like a share. Their structure can use gearing (borrowing to invest), so they often have different risk and return characteristics from open-ended funds.
Should I just buy the cheapest fund?
Cost matters, but so does what the fund actually invests in. A 0.10% UK FTSE 100 tracker is not directly comparable to a 0.25% global ETF — they hold completely different things and have very different risk profiles.