There are two types of investment strategies: active and passive. Actively managed funds have an investment manager(s) making decisions on the underlying portfolio of investments. The goal of an actively managed fund is to exceed the return of a benchmark index like the S&P 500 or the Bloomberg Aggregate US Bond Index. Managers use their investment expertise to make active decisions on what investments to buy or sell, or to deviate from the index and diversify the fund as they see fit. This activity produces investment returns that do not match the underlying index.
Fees for actively managed funds are higher than passively managed (index) funds because the investments are constantly monitored by the manager, analysts, and traders to take advantage of market movements or volatility. There is no guarantee that actively managed funds will outperform their index.
Passively managed funds, or index funds, are the opposite of actively managed funds. The goal of an index fund is to match the investment returns of the benchmark rather than outperform it. Passively managed funds attempt to replicate the index that they are benchmarked to. This strategy minimizes trading and management fees so that investors pay a lower total fee for fund management.