Active vs. passive investing: Which strategy should you choose?

Deciding between active and passive investing largely comes down to how involved you want to be with your portfolio. Active investing involves ongoing management and investment decisions, while passive investing generally puts your money in a preset fund mix that doesn't demand as much attention.

As you determine which approach suits you, you may learn about yourself as an investor, including how your ability to handle risk and timelines matches with your goals. Of course, you don't necessarily have to choose one or the other. But understanding how active vs. passive management works can help you decide which approach, or combination of the two, fits your financial goals.

The level of involvement is one of the biggest differences between active and passive investing, but it isn't the only one. How an investment is managed also can affect its goals, costs and risks. Here’s a look at those differences side by side so you can get a clear sense of each:

Neither one is necessarily better than the other. What matters is how these differences line up with your goals, risk tolerance, budget and the role you want to play in managing your investments.

Active investing puts investment decisions in the hands of a professional portfolio manager or team. They decide which assets to buy and sell based on research and the fund's goals.

For example, let’s say you put money into an actively managed U.S. large-cap stock fund. There's a portfolio manager whose job it is to research and select the stocks that go into that fund. They're looking at a company's financials, its growth prospects, how it stacks up against competitors and where the industry is going.

Based on all that, they decide what to buy, what to sell, and when. As markets move, they keep adjusting the mix to stay on track toward the fund's goals.

Usually, the whole point of an actively managed mutual fund is to beat the market, often measured against a benchmark like the S&P 500 Index. But this isn’t easy. Morningstar’s latest Active/Passive Barometer found that over the 10 years ending June 2026, only 13% of U.S. large-cap active funds were still around and had outperformed the average of their passive peers.

So why might you choose active investing? It can make sense if you want a professional making investment decisions for you or you're looking for a strategy that can respond to changing market conditions. Potential benefits include:

• Active decision-making. Managers can buy and sell investments as they look for opportunities to outperform a benchmark or meet the fund's other objectives.
• Flexibility. Because managers aren't simply following an index, they can adjust the portfolio as market conditions change or new opportunities come up.
• Diversification. Actively managed portfolios may invest across a range of assets, sectors and industries. That diversification can help spread risk and limit how much any one poorly performing investment affects the portfolio.
• Specialized expertise. Some active funds focus on a particular asset class, sector or investment style, giving you access to managers with expertise in that area.
• Income generation. Some actively managed funds focus on generating income. Depending on the fund, managers might select dividend-paying stocks or different types of bonds with varying maturities, credit qualities and yields.
• Customization. Some types of active management can be tailored to your needs, including your risk tolerance, tax considerations and investment goals.

Passive investing takes a more hands-off approach to managing investments. Rather than trying to handpick winners, these funds aim to track a market index, like the S&P 500.

Since there's less research and trading happening behind the scenes, passive funds tend to cost less. In 2025, the average expense ratio for passive funds was around 0.10%, compared to about 0.57% for active funds.

Passive investing has grown in popularity in recent years, particularly if you want to keep things relatively simple and don't need a portfolio manager making frequent changes. Some potential benefits include:

• Lower costs. Passive funds generally have lower expense ratios because there's less research, trading and day-to-day management involved. Even small differences in fees can add up over time.
• Simplicity. You don't have to research individual investments or decide what to buy and sell. The fund follows the index for you.
• Broad diversification. One index fund can hold many investments, helping you spread your money across different companies, sectors or assets.
• Potential tax efficiency. Passive funds tend to trade less often than active funds, which may mean fewer capital gains distributions and potentially less of a tax impact.
• Ease of access. Passive investments are easy for investors to access because they're available in various forms, including mutual funds and ETFs.
• Fewer day-to-day decisions. With less buying and selling to think about, you may be less tempted to react to short-term market swings.

Choosing between active and passive investing comes down to what you want from your investments and what matters most to you. Your goals, risk tolerance, costs and how involved you want to be all can factor into the decision.

Active investing may appeal to you if you're willing to pay higher fees for the potential to outperform the market. A professional manager chooses the investments and can make changes as market conditions shift.

But remember: There's no guarantee those decisions will lead to better returns. Many active funds don't outperform their passive counterparts over the long term, and higher fees can eat into your returns.

Passive investing may make more sense if keeping costs low and management relatively simple are your higher priorities. Rather than relying on a manager to choose investments, you're investing in a fund designed to follow a particular index or benchmark.

That can give you broad market exposure without a lot of ongoing decision-making. You won't be trying to beat the market, but you also won't be paying a manager to try to.

You don't necessarily have to choose one or the other. Some investors use active and passive investments together to get some of the benefits of each.

For example, you might use passive funds for the core of your portfolio, giving you broad market exposure at a relatively low cost. Then you could add actively managed investments for specific goals or sectors where you want professional management.

Performance alone doesn't have to drive your decision between active and passive investing. Think about what matters to you: how much you're willing to pay in fees, how much risk you can handle and whether you'd rather have a professional making the calls or handle things more hands-off yourself.

Those answers are a good starting point for building a portfolio that fits your goals. A Thrivent financial advisor can walk through the tradeoffs with you and help figure out how active and passive investments fit into your broader investment strategy.