A passive fund is a mutual fund, exchange-traded fund (ETF), or unit investment trust (UIT) that follows an investment strategy designed to achieve approximately the same return as a particular index before fees.

Passively managed mutual funds, ETFs, and UITs are also called index funds. An index fund will attempt to achieve its investment objective primarily by investing in the securities (stocks or bonds) of companies that are included in the selected index.

Passive management usually translates into less trading of the fund’s portfolio (lower transaction costs), more favorable income tax consequences (lower realized capital gains), and lower fees and expenses than actively managed funds. Over time, higher fees and expenses can significantly lower investment returns.

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