Glossary · Investing and personal finance
Passive investing
Passive investing means buying a whole market through an index fund and holding it, instead of trying to pick the winners or time the market.
Also called: index investing, indexing, passive management
$12.8T in Q2 2026 (Fed Financial Accounts). In 2000: 0.4%.
On $10,000 in the S&P 500 since Oct 1996, against a 0.03% fee.
In plain words
Imagine a fishing contest where you could either try to catch the biggest fish, or simply take a share of the whole day’s catch. Passive investing is taking the whole catch: instead of picking stocks, you buy an index fund or an ETF that holds every company in a market, in proportion to its size.
Active investors try to beat the market by choosing stocks or moving in and out. Before costs, all investors together are the market, so the average actively managed dollar earns the market return. After its higher fees, it must earn less than a passive dollar.
That arithmetic, and decades of results showing most active funds trailing their index, has moved trillions of dollars into index funds. Exchange-traded funds alone held 10.3% of the stock counted in the Fed’s US accounts in Q2 2026, up from 0.4% in 2000.
Example
Same market, different fees
$100,000 for 30 years in a market that returns 7% a year before costs.
- An index fund costing 0.05% a year: you earn 6.95% and end with $750,626.
- An active fund costing 0.75% a year that merely matches the market before costs: you earn 6.25% and end with $616,408.
- The difference, $134,218, is what the active management cost.
To come out ahead, the active fund must beat the market by more than its extra fee, year after year.
One level deeper
The idea took off in the 1970s. Economists argued that prices already reflect what is known, so beating the market consistently is hard, and in 1976 John Bogle’s Vanguard launched the first index fund for individual investors. William Sharpe’s 1991 essay “The Arithmetic of Active Management” made the fee argument in two pages.
S&P Dow Jones Indices’ SPIVA scorecards regularly find that most US active stock funds trail their index over 10 and 15 years. Passive does not mean safe: an index fund falls as much as its market.
Some worry that if everyone indexes, nobody is left to set prices. For now, active investors still do most of the trading. In the Fed’s Financial Accounts, ETFs’ share of the stock rose from 3.1% in 2010 to 10.3%; index mutual funds come on top of that, but the Fed does not count them separately.
ETFs and mutual funds: their share of the stock in US accounts
Exchange-traded funds, most of which follow an index, grew from almost nothing in the 1990s. Mutual funds, a mix of active and index funds, peaked at 25.3% in Q2 2008 and have lost share since.
The numbers behind the chart
| Date | Exchange-traded funds | Mutual funds |
|---|---|---|
| Q1 1995 | 0.0% | 13.4% |
| Q4 2000 | 0.4% | 21.4% |
| Q4 2010 | 3.1% | 24.0% |
| Q4 2020 | 6.6% | 20.9% |
| Q4 2022 | 7.9% | 18.6% |
| Q4 2023 | 8.4% | 18.1% |
| Q4 2024 | 9.0% | 16.9% |
| Q4 2025 | 9.9% | 15.7% |
| Q2 2026 | 10.3% | 15.1% |
Why it matters
It is the cheapest way to own a market, and costs are one of the few things investors control.
It removes the risk of picking the wrong manager or the wrong stocks, leaving only the market’s own risk.
Its rise has changed who owns companies: the biggest index fund firms now vote shares in nearly every large US company.
A common mistake
Myth: Passive investing means settling for average results.
In fact: It means getting the market’s return minus a tiny fee. Because the average active dollar earns the market return minus a bigger fee, a passive investor ends up ahead of most active investors over long periods, simply by paying less.
Questions people ask
Is passive investing better than active?
After costs, most active funds have trailed their index over long periods, according to S&P’s SPIVA reports. Some active managers do beat the market, but it is hard to know in advance which ones, and few keep it up.
What is the difference between an index fund and an ETF?
An index fund follows an index; an ETF is a fund that trades on an exchange like a stock. Most ETFs are index funds, and many index funds are mutual funds rather than ETFs.
How much money is in passive funds?
In the Fed’s Financial Accounts, US exchange-traded funds held $12.8T of corporate stock in Q2 2026, 10.3% of all the stock counted there. Index mutual funds hold a lot more, but the Fed’s figures do not split mutual funds into active and index.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US corporate equities by holder (Z.1): Board of Governors of the Federal Reserve System, Financial Accounts of the United States (Z.1), table F51.1.s Corporate equities and table S1M.e.b.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- This page explains a term. It is not investment advice.