Active funds
An active fund employs investment managers, analysts, and traders to research individual securities and decide what to hold, what to sell, and when. The aim is to deliver returns above a stated benchmark (e.g. the S&P/NZX 50, the MSCI World, the Bloomberg NZ Bond Index) after fees. Active fees in NZ typically run 0.80%–1.50% per year, sometimes plus a performance fee that kicks in if the fund beats its benchmark by a defined margin. Performance fees are usually subject to high-water marks and benchmark-hurdle rules — the fine print matters.
Passive (index) funds
A passive fund simply holds the benchmark — the same companies, in the same proportions. There is no security selection, no research team trying to outperform; the fund just tracks the index. Passive fees in NZ typically run 0.20%–0.50%. Most NZ-listed ETFs (Smartshares, Foundation Series) are passive; some are factor-tilted (e.g. dividend-weighted) which sits between passive and active. Tracking error — the gap between the fund's return and the index's return — is the passive-equivalent of "manager skill", measured in basis points and almost always due to fees + cash drag + small mechanics.
The empirical picture, mechanically
After fees, the average active fund in most categories has historically returned slightly less than its benchmark — that is the global SPIVA (S&P Indices Versus Active) pattern, repeated across 20+ years and most major markets. NZ doesn't publish its own SPIVA equivalent. Our /insights/active-vs-index/ page applies the same mechanical comparison to the NZ retail-fund universe using FMA Disclose data: across all 7 fund categories, the median fee for index funds is meaningfully lower than for active funds, and the median 5-year return after fees and tax is broadly similar. The variation within active is wide: some active managers beat the benchmark consistently over decades; many do not. Identifying which is which in advance is the genuine open question — see the SPIVA report and the FMA fees-and-value-for-money guidance for the trade-offs.
Why might you choose passive?
Pick passive if you want low cost, simple exposure, and no manager-selection risk. The fund is doing exactly what it says on the tin — tracking an index — so there's no question whether the manager will outperform; they won't (after fees), but they won't materially underperform either. Passive also tends to be tax-efficient: lower turnover means fewer realised gains, lower transaction costs, and a smaller tax drag inside the PIE. For many NZers, a portfolio of 2–4 broad-market index funds (NZ shares, international shares, bonds) is sufficient.
Why might you choose active?
Pick active if you have a specific manager you trust to outperform after fees, or you want exposure that the index doesn't offer (e.g. responsible-investment screens that exclude tobacco / weapons / fossil fuels, concentrated positions, strategies the index excludes by design like long-short or unhedged international with currency overlay). Active is also the only structure for some kinds of exposure — there's no NZ-listed-property index ETF that excludes mall REITs, for example. The fee is buying you (a) hopefully outperformance and (b) definitely a specific portfolio decision.
The blended approach most NZers actually use
In practice, many NZ investors hold a mix: passive for the core (broad-market index funds for the bulk of the portfolio) and active for satellites (one or two high-conviction active funds for specific exposure — say, a NZ small-cap manager, or a global responsible-investment fund). This balances the cost-efficiency of passive with the targeted exposure of active without making the whole portfolio depend on manager skill. The exact split (70/30, 80/20, 90/10) is a personal preference more than a mathematical answer.
Common misconceptions
"Active is always more expensive." Mostly true but not always — some factor-tilted index funds charge above 0.50%, and some institutional-style active funds available in NZ via InvestNow charge under 0.70%. Always read the published Annual Fund Charge. "Passive funds match the index exactly." No — there's always a small tracking error from fees, cash drag, and mechanics; well-run passive funds have tracking error of 5–15 basis points per year. "Active funds always underperform." No — on average they do after fees, but individual active funds can outperform consistently. The known difficulty is picking the outperformers in advance.
What to compare on a fund page
When you compare an active and a passive fund head-to-head, look at three numbers: (1) Annual Fund Charge — what you pay every year regardless of performance, (2) 5-year return after fees and tax — the standardised FMA-mandated figure (longer history is better but 5y is what every QFU publishes), (3) Risk indicator (1–7) — the standardised volatility band. Don't focus on 1-year returns; they bounce around for both styles. Our /insights/active-vs-index/ page does this comparison in cohort form across all 7 categories.