A passive investment fund follows an index, its portfolio is made up of the same elements and in the same proportion as that index. For example, the NAFTRAC in Mexico is based on the S&P/BMV IPC, the main stock market index made up of the 35 companies with the highest securitization. An active fund does not seek to replicate the index, but rather to improve the performance of the benchmark by choosing what to invest in and when, and by the weighting it gives to each asset.
Passive management has gained more and more followers. Since 2018, the amount managed by ETFs has doubled to around $9 trillion globally, because “they benefit from being diversified, liquid, tax-efficient and low-cost,” explains Ben Laidler, eToro Global Strategist.
They have also been the best performers, as the market was coming off an uptrend that lasted for nearly 10 years. Over the past decade, 90% of active large-cap funds in the US have underperformed the S&P 500; in Mexico, 77.5% underperformed the S&P/BMV IRT and, in Europe, 87.8% of funds underperformed the S&P Europe 350.
However, during the first six months of 2022, the ratio improved for active funds, as it was a negative year for stocks. Major US indices such as the S&P500, Dow Jones and Nasdaq all fell between 10 and 30%. In Mexico, the S&P/BMV IPC fell 6% and globally, the MSCI World fell 17%. In this way, those who followed a passive management are the same, in the red.