Passive vs Active Investing: Which Works Better?

The evidence strongly favours passive investing for most Australians. Broad index funds like the Vanguard Australian Shares Index ETF (VAS) or the iShares Core S&P 500 ETF (IVV) consistently outperform the majority of actively managed funds over 10-year-plus periods — and they do it at a fraction of the cost. That’s not to say active investing is worthless; it has a place for specific goals and tax situations. But for the average investor building long-term wealth, passive is almost always the smarter starting point.

General information only. This article does not constitute financial advice. Consider your own circumstances before making investment decisions.

What’s the Actual Difference?

Passive investing means tracking an index — buying a fund that holds every stock in, say, the ASX 200 or the S&P 500 — rather than trying to pick winners. You’re accepting the market return, nothing more and nothing less.

Active investing means a fund manager (or you) making deliberate choices: overweighting certain sectors, timing entries and exits, and attempting to beat that index. It sounds appealing. It rarely works over time.

The S&P SPIVA Australia Scorecard for 2025 found that over 15 years, more than 85% of actively managed Australian equity funds underperformed the S&P/ASX 200 Total Return Index. That result has been consistent for well over a decade, and it’s not getting better for active managers.

The Cost Gap Is Bigger Than You Think

The management expense ratio (MER) is where passive investing wins quietly, every single year.

VAS, Vanguard’s flagship Australian shares ETF, charges 0.07% per annum. A typical actively managed Australian equity fund charges between 0.75% and 1.2%. On a $100,000 portfolio, that’s a $680–$1,130 annual difference in fees alone — before any consideration of performance.

Over 20 years, assuming an 8% annual return before fees, that drag compounds dramatically. A passive portfolio at 0.07% MER grows to roughly $462,000. The same money in an active fund at 1.0% MER grows to only around $386,000. The fee difference alone costs you over $75,000.

Betashares, Vanguard, and iShares are the three dominant ETF providers on the ASX for passive exposure. All offer MERs below 0.20% for their broad market index products.

When Active Investing Can Make Sense

This isn’t a binary debate. There are legitimate reasons to include active strategies in a portfolio.

Tax-loss harvesting and direct indexing — some higher-net-worth investors use semi-active strategies through Sharesight-tracked portfolios or direct indexing platforms to harvest capital losses on individual positions that a pooled ETF can’t replicate.

Sector-specific exposure — if you have genuine conviction about Australian small-caps or a specific theme, some active funds offer targeted exposure that standard index ETFs don’t capture. Hyperion Asset Management, for example, has posted strong long-term numbers with a concentrated quality-growth approach.

Less efficient markets — passive works brilliantly in large-cap markets where prices reflect information rapidly. In smaller, less-covered markets, skilled active managers have a more credible case for finding mispriced stocks.

The key word is “more credible.” Most retail investors should still begin with passive exposure covering 80–90% of their portfolio before layering in any active tilts.

Australian Index ETFs Worth Knowing

If you’re building a passive core, these are the ETFs most commonly used by Australian investors right now:

• VAS — Vanguard Australian Shares Index ETF, top 300 ASX stocks, MER 0.07%
• IVV — iShares Core S&P 500 ETF, 500 largest US stocks, MER 0.04%
• VGS — Vanguard MSCI International Shares ETF, developed world ex-Australia, MER 0.18%
• VDHG — Vanguard Diversified High Growth ETF, an all-in-one diversified fund, MER 0.27%

For most Australians starting out, a combination of VAS + VGS, or simply VDHG, covers the major bases without requiring active decision-making year to year. VDHG in particular suits investors who want to set-and-forget with a single ASX-listed ticker.

Frequently Asked Questions

Can you mix passive and active investing?

Yes, and many experienced investors do. A common approach is to hold 80–90% in low-cost index ETFs and allocate the remainder to active funds or individual stocks where you have specific conviction or a tax strategy reason. This keeps the bulk of your wealth compounding at near-market rates while still allowing targeted bets.

Does passive investing protect you in a market downturn?

No — passive funds fall with the market. There’s no fund manager stepping in to reduce risk. However, over long periods, the data shows most active funds also fall during downturns, then fail to recover enough to offset their fee drag. Broad diversification across asset classes (Australian shares, international shares, bonds) is a more reliable risk management tool than simply choosing active over passive.

How do I start with passive investing in Australia?

You need a brokerage account to buy ETFs on the ASX. Platforms like Stake, CommSec, or CMC Markets Invest all allow ETF purchases from around $50–$500. Once your account is verified, search the ASX ticker — VAS, IVV, or VDHG — choose how many units you want, and place a market or limit order. The whole process takes under 10 minutes once you’re set up.