Difference Between Active and Passive ETF Management – A Simple Guide for Indian Investors

Many people in India now put money in ETFs. ETF stands for Exchange Traded Fund. It is like a basket of shares. You buy it on the stock exchange just like a share. But there is a big question. Difference between active and passive ETF management is something every investor should know.

Without knowing this difference, you may pick the wrong fund and lose money or pay too much fee. So let us clearly understand the difference. You will also learn about active vs passive ETF performance. You will get a passive ETF list and an active ETF list. This is for Indian investors who want clear answers.

What is an Active ETF?

An active ETF has a fund manager. This person does not just follow an index. The manager picks shares. The manager also drops shares. The goal is to get more returns than the market. For example, if Nifty goes up 10 percent, the active ETF tries to go up 15 percent. The manager looks at company profit, news, and trends. Then the manager takes a call. This is active management. The fund house charges a fee for this work.

In India, some active ETFs are there. They are less common than passive ones. But they exist. You can find them under different fund houses. They have higher cost. That is because of the manager salary and research team.

Read More: How to Track Global Market Trends Using ETFs | Best ETFs India

What is a Passive ETF?

A passive ETF does not try to beat the market. It copies the market. For example, a Nifty 50 passive ETF will buy all 50 Nifty shares. It will buy in the same weight as Nifty. If Nifty goes up 10 percent, the ETF goes up nearly 10 percent. If Nifty falls, the ETF falls. There is no manager trying to do something smart. There is only a rule. Follow the index. This is passive management.

Passive ETFs are very common in India. Most people buy them. They are cheap. The fund house does not spend money on research or active trading. That is why the expense ratio is low.

Main Difference Between Active and Passive ETF Management

Here is the simple difference.

• First, decision making. In active ETF, a human takes many calls. In passive ETF, a computer follows a fixed list.
• Second, cost. Active ETFs have high expense ratio. In India, an active ETF may charge 0.8 to 1.5 percent. A passive ETF charges 0.1 to 0.5 percent.
• Third, returns. Active ETF tries to give high returns. But it can also give low returns if the manager makes wrong picks. Passive ETF gives market returns. Nothing more. Nothing less.
• Fourth, risk. Active ETF has manager risk. If the manager leaves, performance can change. Passive ETF has no manager risk.
• Fifth, transparency. Passive ETF shows its holdings every day. You know exactly what shares are inside. Active ETF may show holdings once a month. It may change shares without telling you right away.

Active vs Passive ETF Performance – What Works in India

Many studies show a clear thing. Over five years or ten years, most active funds in India do not beat the index. This is true for mutual funds. It is also true for ETFs. The reason is simple. Higher fees eat the returns. Also, no manager can guess the market correctly every time.

For example, an active ETF charges 1 percent extra. If the market gives 12 percent, the active ETF needs to give 13 percent just to be equal after cost. That is tough. Most managers fail to do that year after year.

Passive ETFs do not try to beat. They give market return. That market return is often better than what most active ETFs give after cost. That is why many advisors in India say buy passive ETFs. But some investors still like active ETFs. They believe a good manager can find hidden gems.

The truth is simple. For long term, passive ETFs give more reliable returns. For short term, some active ETFs may do well. But that is not guaranteed.

Passive ETF List for Indian Investors

Here is a simple list of passive ETFs available in India. These are easy to buy from any demat account. They track Nifty, Sensex, or other indexes.

• Nippon India ETF Nifty 50
• UTI Nifty 50 ETF
• SBI ETF Nifty 50
• HDFC Nifty 50 ETF
• ICICI Prudential Nifty 50 ETF
• Motilal Oswal Nifty 50 ETF
• Bharat 22 ETF (this tracks a special government index)
• CPSE ETF (this tracks government companies)

These are passive. They simply follow an index. Their expense ratio is low. They are good for long term.

Active ETF List for Indian Investors

Active ETFs are new in India. But some fund houses have started them. Here is a list.

• Motilal Oswal Nasdaq 100 Active ETF (this follows Nasdaq but active in rebalancing)
• Mirae Asset NYSE FANG+ ETF (this is active in picking top tech stocks)
• Some global active ETFs from ICICI and Nippon India

Please note. The active ETF list in India is small. Most ETFs in India are passive. But fund houses are now launching more active ones. Before buying, always check the scheme document. It will clearly say active or passive.

You May Also Read: Best US-Focused ETFs for Indian Investors

Which One is Good for You – Active or Passive

This depends on your goal.

If you want low cost and safe returns, pick passive ETF. You will get what the market gives. No tension. No manager risk. This is good for most people in India. You can hold for ten years or more.

If you are okay with higher cost and want chance of high return, pick active ETF. But be ready for low return also. Active ETFs can go down more than the market. Because the manager may pick wrong shares. Only choose active if you trust the fund house and the manager history.

Also do not put all money in one type. You can keep 70 percent in passive and 30 percent in active. That way your risk is less. And you still get chance to earn extra.

Final Word for Indian Investor

Do not fall for fancy words. Active sounds powerful. But passive is simple and works. For most people in India, a passive ETF like Nippon India ETF Nifty 50 or UTI Nifty 50 ETF is enough. You save cost. You get market return. You sleep well.

If you still want active, put small money. See how it performs for two years. Then decide. The difference between active and passive ETF management is clear. One chases returns. One copies the market. Over long years, copying the market is often better. Keep your plan simple. Keep your cost low. That is the real winning way.

FAQs

Do active ETFs give better return than passive in India?

Not always. Over long time, passive often wins. Over one or two years, some active win. But you cannot know before.

Where to find latest passive ETF list?

Go to NSE India website. Click on ETF section. Filter by index based ETFs.

Are active ETFs risky?

Yes. They have extra risk of manager mistake. That is on top of market risk.

Which is cheaper in India?

Passive is cheaper. Expense ratio is much lower.

Can I buy both?

Yes. You can buy both from your demat account. Many people do that.