What is active management?

If a mutual fund is "actively managed," the fund manager constructs the fund's portfolio with stocks and other investments that may outperform the market. Finding these opportunities takes extensive research and analysis (thus the term "active").

Advantages

• Expertise: Investors rely on a fund manager's knowledge to interpret and act on market trends.
• Returns: Actively managed funds may have the potential to outperform the market as a whole.
• Proactive: Active managers can help eliminate sluggish investments in favor of more profitable ones.

What is indexing?

Indexing (or "passive management") tries to mirror the performance and risk characteristics of a particular index, like the S&P 500^® or the Russell 2000. These funds tend to have lower expenses since index fund managers don't rely on a research staff, nor do they buy and sell securities as frequently. You cannot invest directly in an index, and past performance is no guarantee of future results.

Advantages

• Stability: Historically, index fund returns have been in line with the index they are designed to track.
• Cost: Index funds tend to have low operating costs because there's very little research or trading.
• Diversification: Index funds can provide exposure to multiple industries.