# Index funds vs active funds > Investing & ISAs · Last updated 6 April 2025 Canonical HTML: https://moneyguide.org.uk/investing/index-vs-active-funds/ Markdown mirror: https://moneyguide.org.uk/investing/index-vs-active-funds.md ## 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. ## Key facts - Index/passive funds: aim to track an index. OCFs typically 0.05%–0.25%. - Active funds: a manager picks holdings. OCFs typically 0.50%–1.50%. - SPIVA studies consistently find that, over 10+ years, the majority of active funds underperform their benchmark after fees. - Past performance does not guarantee future results — for either approach. ## 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 and consistently shows that over 10 years 70%–90% of active funds in most major categories underperform their benchmark after fees. Survivorship bias makes the real numbers slightly worse — many underperforming funds are closed or merged. 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. ## Frequently asked 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. ## Primary source https://www.spglobal.com/spdji/en/research-insights/spiva/ ## Related - [Investing & ISAs guide](https://moneyguide.org.uk/investing/) - [Investment fees explained](https://moneyguide.org.uk/investing/investment-fees-explained/) - [Stocks & Shares ISA basics](https://moneyguide.org.uk/investing/stocks-and-shares-isa-basics/) --- Independent UK money guidance from [Money Guide](https://moneyguide.org.uk). Information only — not regulated financial advice.