Which statement is true regarding active vs passive management and costs?

• A. Active management typically aims to outperform and has higher fees, while passive tracks an index.
• B. Active management has lower fees than passive.
• C. Passive management has higher taxes than active.
• D. Both approaches have identical costs and performance.

Answer: (A)

Active management aims to beat a benchmark by selecting investments and possibly timing the market, which requires more research, analysis, and trading. That extra effort drives higher fees and expenses for active funds. In contrast, passive management simply tracks an index, so it involves less research and trading and carries much lower fees. Costs directly affect net returns, so the higher price tag of active management reduces the advantage it seeks to deliver. While active funds try to outperform, many studies show that after Fees, the average active fund does not consistently outperform the index over the long term. Taxes can vary with turnover, and because active funds often turnover more, they can be less tax-efficient than passive funds, though this isn’t a hard rule in every situation. The statement captures the essential contrast: active management targets outperformance but costs more, while passive management tracks an index with lower costs.