There are many differences between passively managed funds and actively managed funds but one of the main ones is the cost to the investor: passively managed funds have lower costs than actively managed funds. This lower cost does not imply that, with the same strategy, they offer a higher return.
So that you can make a decision, let us tell you why this cost difference between the two management types exists:
Costs of passive management: these are low because passively managed funds replicate indexes and, using different techniques, this form of management can be inexpensive for the fund manager. For an investor it would be more difficult to create a diversified portfolio like that of an index and still have the low costs of a passively managed fund.
Costs of active management: actively managed funds try to beat their benchmark indexes, achieving a risk-adjusted long-term return, and to do this the managers must analyse the financial markets, build a vision of the future, bet actively against the indexes, etc., to try to anticipate the behaviour of the markets, exploit their inefficiencies and, thus, achieve a greater return.
When comparing the results of some funds with others, keep in mind that:
Passive management makes sense as a way to obtain the market beta (sensitivity to the movements in the benchmark index; for example, beta 1 means behaving like the indexes).
Active management makes sense as a way of obtaining a positive alpha (extra return between a fund and its index). Therefore, the important thing in active management is to consistently beat the benchmark index. This is possible for the leading managers in each asset class.