Definition
Passive management seeks to match, not beat, a benchmark index by holding its constituent securities in proportion. Index funds and ETFs provide broad market exposure at extremely low cost (0.03-0.10% fees). The efficient market hypothesis supports indexing—if prices reflect all available information, trying to beat the market is futile after transaction costs.
lightbulb Example
A total stock market index fund holds 3,500+ stocks in proportion to market cap, charges 0.03% annually, and consistently delivers market returns minus minimal fees. Over 20 years, it outperforms 85%+ of active managers.
verified_user Key Points
- Replicates a benchmark index at minimal cost
- Fees typically 0.03-0.10% vs 0.50-1.50% for active
- Outperforms most active managers over long periods
- Supported by efficient market hypothesis