Active vs. Passive Investing

Two investment strategies dominate the landscape, leaving most investors standing staunchly in one camp or the other. On one side is passive investing whereby investors limit the buying and selling of stocks and instead invest long-term in index and mutual funds. On the other side is active investing, which entails experienced portfolio managers buying and selling securities to take advantage of market opportunities. Understanding the differences between both strategies is important for matching the right tack to the intended investment goal and accepted risk level.

Passive investors typically invest in index funds that are designed to mimic the broader market, like those that resemble the S&P 500. Index funds provide broad exposure to the economy, have low management expenses, and a steady portfolio makeup. They also automatically adjust to changes in the market they’re indexed against, such that when a company leaves the S&P 500, it also leaves the index. Passive investment remains invested in the chosen index and mutual funds regardless of market swings. It essentially rides out the highs with the lows, following the often true assumption that the market tends to go up over time.

Passive investment has many advantages that make it the default strategy for most investors. These benefits include low fees, high transparency, and good tax efficiency. According to critics of passive investment, however, the strategy lacks flexibility, leaving investors stuck with index and mutual funds even in a market crash. Passive investing also rarely outperforms the market.

Historically, passive investing garners greater returns than active investing over time, but active investing is becoming more popular lately. This is in part due to the increasing volatility of the market as well as the enticement of nascent industries in the technology and sustainability spaces. Active managers want to take advantage of both of these factors. With deep expertise in both qualitative and quantitative analysis, active investors seek to leverage market inefficiencies to gain greater market returns. They also want to take advantage of hyper-growth companies that might become household names years from now as opposed to investing passively in today’s big names.

Active investing has the advantage of flexibility as investors aim to buy under-the-radar stocks, hedge their bets to manage risk, and pivot with the market when it changes, whether in response to negative macroeconomic factors or upcoming trends. Active investing also can potentially benefit from the tailored oversight that a portfolio manager provides their client.

Active investing can be more expensive than passive management. Active investing can also be more risky. The portfolio manager needs to choose the right investments at the right time more often and more significantly than the times when they get it wrong.

TrueShares exemplifies active investing in nascent industries. Some of our active investing ETFs include the TrueShares Structured Outcome ETF, which implements a buffer strategy that seeks to headge against the first 10% of losses. The TrueShares Low Volatility Equity Income ETF (DIVZ) focuses on capital-appreciation opportunities in the form of dividends.

Other examples of TrueShares’ active investing include the ESG Active Opportunities ETF (ECOZ) and the Technology, AI, and Deep Learning ETF (LRNZ). The former is a diversified portfolio of large companies with favorable Environmental, Social, Governance (ESG) ratings. We believe the LRNZ ETF exemplifies the active investing strategy with the greatest prospect of outperforming the market. LRNZ’s portfolio managers use their expertise of the nascent economy, characterized strongly by sophisticated technology with applications across diversified industries, seeking to find the next big name before the market catches on and while market downturns provide favorable conditions to buy low as an entry point into an attractive emerging market.