Passive Management

Passive management is a style of management associated with mutual and exchange-traded funds (ETF) where a fund’s portfolio mirrors a market index. Passive management is the opposite of active management in which a fund’s manager(s) attempt to beat the market with various investing strategies and buying/selling decisions of a portfolio’s securities. Passive management is also referred to as “passive strategy,” “passive investing” or ” index investing.” — Investopedia

“Indexing” Attempts to Match Returns of Benchmark

Graphic: Adapted from Dimensional Fund Advisors. Past performance is no guarantee of future results.

Index funds hold a basket of securities represented in the index (or benchmark) and, like factor investing, leverage diversification to minimize risk. Index investment strategies are typically defined by a commercial index provider, and the manager has no control over what the fund holds.

Although index funds generally track returns of their benchmark (before fees), the returns of low carbon index funds — which exclude or underweight fossil fuels — may experience an unknown amount of deviation, either positive or negative, from benchmarks like the S&P 500 and MSCI All Country World Index.

Since there’s now little doubt we’ll face significant climate change effects in our lifetimes, reducing exposure to fossil fuels — via passive, active or factor approaches — is likely to offer more upside than downside for long-term investors. However, you never know which market sectors will outperform from year to year in the short term.