An active, or actively managed, mutual fund or exchange-traded fund (ETF) follows an investment strategy that relies on the skill of an investment adviser to construct and manage its portfolio in an effort to provide exposure to certain types of investments or outperform an investment benchmark or index.

This means that an adviser of an actively managed fund may buy or sell investments in the portfolio without regard to conformity with an index. But the investments must be consistent with the overall investment objective and strategies of the fund. The performance of an actively managed fund is heavily dependent on the skill of the manager, along with other economic factors.

Actively managed funds historically have had higher management fees than passively managed funds. Over time, higher fees and expenses can significantly lower investment returns. In addition, more active management of portfolio assets often leads to higher turnover costs (the costs of buying and selling investments in the portfolio) and potentially negative federal income tax consequences.

Before investing in an actively managed fund, you should carefully read the fund’s available information, including its prospectus and most recent shareholder report.