An index mutual fund or exchange traded fund is described as passively managed because the securities in its portfolio change only when the make-up of the index it tracks is changed.
For example, a mutual fund that tracks the Standard & Poor's 500 Index buys and sells only when the S&P index committee announces which companies have been added to and dropped from the index.
In contrast, when mutual funds are actively managed, their managers select investments with an eye to enabling the fund to achieve its investment objective and outperform its benchmark index. Their portfolios tend to change more frequently as a result. They also tend to have higher fees.
The performance of passively managed indexed investments and their risk profiles tend to correspond closely to the asset class or subclass that the index tracks. They tend to be more popular in bull markets when their returns reflect the market strength and less popular in bear markets when active managers may provide stronger returns.
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