Active or passive? It is one of the oldest debates in investing, and one of the most consequential for your long-term returns. The honest answer is that the data favors passive for most investors most of the time, but not always, and not in every asset class. Here is what the evidence actually shows.
Last verified: May 2026
Key takeaways
- Passive investing tracks an index: It buys the same securities as a benchmark like the S&P 500 or the SMI, aiming to match the market, not beat it.
- Active investing tries to beat the market: A portfolio manager picks holdings to generate « alpha, » the excess return above the benchmark.
- Most active funds underperform after fees: In our study of 6,096 funds available to Swiss investors, only about 36 percent beat their benchmark in the harder years of 2020 and 2022.
- The asset class matters: US large-cap equities are extremely hard to beat. Less efficient markets like small caps and emerging markets give active managers more room.
- Cost is the deciding factor over time: Passive funds cost 0.05 to 0.30 percent per year, active funds 1.0 to 2.0 percent. Over decades, that gap compounds into a large difference.
What is passive investing?
Passive investment products, most commonly index funds and ETFs, follow a given benchmark. The fund simply buys the underlying assets the benchmark holds, in the same weights, and sells what the benchmark sells. There is no attempt to pick winners or time the market. The goal is to match the index, minus a very small fee.
Because there is no research team trying to outsmart the market, costs are low. A broad index ETF typically charges between 0.05 and 0.30 percent per year. For the investor, passive means buying the whole haystack rather than hunting for the needle.
What is active investing?
Active investment products, typically actively managed funds, employ a portfolio manager who makes deliberate decisions about what the fund holds. The manager follows a specific strategy or applies their market views, aiming to outperform the benchmark rather than simply track it.
When a manager succeeds and beats their benchmark, we say they generated « alpha. » The promise of active management is this excess return. The cost of that promise is higher fees, typically 1.0 to 2.0 percent per year, and the risk that the manager underperforms instead.
Alpha and the benchmark, explained
Two terms sit at the center of this debate, so they are worth defining plainly.
A benchmark is a standard: a set of securities representing a particular segment of the market, used for comparison and performance measurement. The Swiss Market Index (SMI), for example, is composed of the 20 largest Swiss-listed companies and is often used to assess the performance of the Swiss equity market.
Alpha (also called excess return) is the return a manager generates above their benchmark. If the SMI returns 8 percent in a year and an active Swiss equity fund returns 10 percent, the manager generated 2 percent of alpha. If the fund returns 6 percent, the manager produced negative alpha, underperforming the market they were measured against.
The evidence: how often does active win?
It is easier to generate alpha in some asset classes than in others. US large-cap equities, for instance, are notoriously difficult: the market is so well-researched and efficient that consistently beating it is rare.
To illustrate, we examined 8,991 funds accessible to a Swiss investor and narrowed to the 6,096 with a track record since 2018. We then looked at how many generated positive excess return in each year from 2018 to 2022:
- 2018, 2019, 2021: Years of roughly average market volatility. In 2018, about 59 percent of funds generated a positive excess return, a relatively common outcome.
- 2020: A far tougher year. Only 35.65 percent of funds beat their benchmark, as the Covid crisis upended markets.
- 2022: Only about 36 percent outperformed, amid the war in Ukraine, rising inflation, and rate hikes.
The pattern is telling. In calm years, a slight majority of active managers can add value. In the eventful years that matter most, when extreme macroeconomic shocks hit, most active managers underperform precisely when investors hoped they would protect them. And these figures are before the higher fees of active funds are deducted, which pushes net outcomes lower still.
Active vs passive: side by side
| Factor | Passive investing | Active investing |
|---|---|---|
| Goal | Match the benchmark | Beat the benchmark (generate alpha) |
| Typical annual fee | 0.05% to 0.30% | 1.0% to 2.0% |
| Track record vs benchmark | Matches it by design | Most underperform after fees |
| Best-suited asset classes | Efficient markets (US large cap) | Less efficient markets (small cap, emerging) |
| Transparency | High, holdings track a public index | Lower, manager discretion |
| Best for | Most long-term investors, core holdings | Specific niches, investors with conviction |
Which is right for you?
For most investors building long-term wealth, a passive core is the rational default. It is cheap, transparent, and over time it beats the majority of active managers in efficient markets. The math of compounding low fees over decades is hard to argue with.
Active management still has a place. In less efficient corners of the market, such as small-cap equities, emerging markets, or specialized credit, a skilled manager has more room to add value. Some investors also prefer active strategies for specific goals like income, downside protection, or thematic exposure.
In practice, many well-built portfolios blend the two: a low-cost passive core for broad market exposure, with selective active positions where the manager genuinely earns their fee. Alpian’s investment mandate is built around this evidence-based approach, combining cost-efficient core holdings with active decisions where they add measurable value.
The most important takeaway is not « passive always wins. » It is that you should know what you are paying for. If you are paying active fees, you should expect, and monitor for, active results.
Frequently asked questions
Is passive investing better than active investing?
For most investors most of the time, yes. Passive funds are cheaper and reliably match their benchmark, while the majority of active funds underperform after fees, especially in efficient markets like US large-cap equities. However, active management can add value in less efficient asset classes such as small caps and emerging markets.
What is alpha in investing?
Alpha, also called excess return, is the return an active manager generates above their benchmark. If the benchmark returns 8 percent and the fund returns 10 percent, the manager produced 2 percent of alpha. Generating consistent positive alpha is difficult, particularly in well-researched markets.
Why do most active funds underperform?
Two reasons. First, markets are competitive, so consistently picking winners is hard. Second, active funds charge much higher fees (1.0 to 2.0 percent versus 0.05 to 0.30 percent for passive), which is a constant drag on returns. Even a manager who matches the market gross will underperform it net of fees.
Can I combine active and passive investing?
Yes, and many investors do. A common approach is a « core-satellite » structure: a large, low-cost passive core for broad market exposure, surrounded by smaller active positions in niches where a manager can add value. Alpian’s investment mandate blends both based on where active management is justified.
Which is cheaper, active or passive?
Passive is significantly cheaper. Index funds and ETFs typically cost 0.05 to 0.30 percent per year, while actively managed funds usually charge 1.0 to 2.0 percent. Over a multi-decade horizon, that fee difference compounds into a very large gap in final wealth.
Related reading: are ETFs really cheap?, creating your long-term investment strategy, and discretionary vs advisory mandates.
