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Actively vs. Passively Managed Funds


Whether a fund is actively or passively managed can substantially affect your bottom line. As you will see in the table below, fund management can impact something as simple as how diversified the fund’s investments are, to more complex issues such as tax efficiency.

Before investing in any mutual fund, carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. Free prospectuses may be ordered from the fund company or send a request to [email protected]. Many but not all prospectuses are available online. Not all mutual funds are available through TradeKing. Read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.



Actively Managed Fund

Passively Managed Fund

Securities selection

Buys and sells individual securities based on portfolio manager's judgment and the fund objectives stated in the prospectus.

Buys securities based on a specific index and typically trades only when the underlying index changes. Some passively managed funds may have an indirect form of active management if the underlying index is based on performance-driven or fundamental data.

Goal of investing approach

Attempts to either improve on benchmark returns through the portfolio manager's securities selection and timing of their purchase and sale, or reduce risk for a given rate of return.

Attempts to approximate market returns for a given market (e.g. large-cap stocks, the S&P 500, bonds, etc.) as represented by a specific index.

Diversification

May invest in multiple types of investments, depending on investment objective.

Most passively managed funds invest in a single asset class and hold relatively little cash.

Weighting of securities

Depends on manager's view of prospects for individual sectors, companies, or securities; may have a target ("neutral") mix of various sectors or types of securities, but may also vary from that mix.

Typically replicates the index's weighting of securities.

Tax efficiency

Depends on the fund's strategy. Some have high turnover ratios and are relatively tax-inefficient, while others are managed specifically to minimize portfolio turnover and annual taxable capital gains distributions.

Relatively infrequent trading tends to minimize taxable capital gains distributions.

Performance gauge

Typically, a fund's performance is compared to that of similar funds, as well as to a relevant index.

A fund's performance is compared to the relevant benchmark index.

Major risks

In addition to the risks involved with the individual securities in the fund, a portfolio manager may not beat or even match the relevant benchmark index. Risks are outlined in a fund's prospectus, which should be obtained and read before investing.

Risks are generally based on the individual securities in the index, though costs may prevent a fund from matching index performance.

Expenses

May have sales loads, 12b-1 marketing fees, redemption fees, and management fees.

Index mutual funds and exchange-traded funds may have sales charges, 12b-1 marketing fees, redemption fees. They also may have management fees, though passive management typically reduces those costs.






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