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, 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.

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