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A fund is considered to be active if it differentiates from its benchmark. This can be measured by the active share of a fund.
A portfolio that perfectly matches its benchmark will have an active share of 0% and a portfolio that has no common holdings will have an active share of 100%.
A fund is referred to as active if it tries to pick the best stocks within its universe.
Some active funds seek to buy into high-quality companies and to own them for decades. They are therefore not active in the sense of buying and selling positions.
I refer to the approach as "inactive, active investing."
Index trackers the default option
Index trackers are low cost and will inevitably own the winners that drive the market forward. They offer instant diversification and are you are not exposed to active fund manager risk.
Buying a tracker fund is, therefore, a sound default option for investors. Index investing doesn't try to forecast the future.
The downside is that market indices include lower quality sectors and companies. Examples include banks, real estate and chemicals.
Lower quality sectors tend to underperform over the long-term. They generate low returns on capital and have more downside risk.