Active vs Passive: The Final ETF Decision

Welcome to Financial Fluency - your weekly guide to mastering financial English, learning how money works, and making confident financial choices.

In this issue:

• A Look at the Markets: ARK Invest - ARKK

• Active vs Passive: The Final ETF Decision

• Quote of the Day: Cathie Wood

• We value your feedback

• Word of the Day: Fly Under the Radar

• Interactive Quiz

• Whenever you are ready, here is how I can help you

A Look at the Markets: ARK Invest - ARKK

ARKK is showing strong signs of recovery in 2025, though it's still around 50% down from its all-time highs. The recent upward momentum suggests that investors may be regaining confidence in Cathie Wood's innovation-focused strategy, but the fund still has a long way to go to reach its previous peaks.

Active vs Passive: The Final ETF Decision

Why fund managers make headlines but passive ETFs make money

Active funds often hit the headlines. Passive ETFs often fly under the radar, quietly delivering steady returns almost unnoticed.

Market commentators like to talk about characters, and one way to do this is to discuss the people behind active funds. Often, they are either the current genius or blamed for losing their investors' money. Although the reality is usually somewhere in the middle, surprisingly often active managers have excellent years followed by disastrous years.

In this newsletter, we will look at an example, but first, I will define active and passive funds.

What are Active Funds?

Active funds are actively managed by a fund manager.

This means that a fund manager selects what to invest in, when to buy and when to sell. Often fund managers choose a particular sector or strategy, like Cathie Wood focusing on disruptive technology companies. Active fund managers try and build their reputation on outperforming the market.

Active funds are almost always more expensive than passive funds as they cost more to run with a fund mananger and teams of analysts.

What are Passive Funds?

Passive funds follow an index, such as the S&P 500 or the FTSE All-World index.

There is no fund manager deciding what to invest in and when to buy and sell. Passive funds are effectively run by computers replicating the chosen index as closely as possible.

For this reason, the charges for passive funds are usually very low.

Cathie Wood - The Next Warren Buffett?

Cathie Wood came to prominent public notice around 2019 and 2020.

Her ARK Innovation ETF (ARKK), which she started in 2014, had started delivering incredible returns, outperforming well-known investors such as Warren Buffett. The chart below from 2015 to the end of 2020 shows ARKK outperforming the S&P 500 by 520% compared to 87%!

You can see why market commentators were talking about her so highly.

Cathie Wood Can Do Nothing Right!

The expanded view of the chart above to the end of 2022, only 2 years later and, as you can see, tells a completely different story.

ARKK's 520% performance since 2015 has fallen to only 52%. The S&P 500 performance has increased from 87% to 97% though there was increased volatility during and after the Covid pandemic.

Anyone who had invested in ARKK at the peak in February 2021 would have lost over 80% of their investment (from $160 to $30).

Not the End for Cathie Wood!

If we expand the chart to today you can see that her ARKK fund is actually ahead of the S&P500 again.

Investors who held on can argue they are now ahead of where they would have been if they had just invested in the S&P500. However, many investors could not stand the volatility and bought high and sold low. It should be noted that not all active managers recover, such as Terry Smith's Fundsmith.

This leads us into how I view active and passive funds.

My Strategy

The majority of my portfolio is invested in a passive global fund, which I buy and hold for the long-term.

However, I do have part of my allocation where I invest in individual shares - my fun portfolio. I view active funds as part of this portfolio and I actively decide when to buy and sell these active funds in the same way as individual shares.

For most people, the best option may be to buy and hold passive funds that match your risk tolerance.

Next Week

Next week, I will explain when I invest and the simple strategy I use.

As always, none of this is financial advice. Everyone should invest according to their personal circumstances, risk tolerance and financial goals.

Quote of the Day: Cathie Wood

This quote perfectly captures the dramatic swing in media perception that active fund managers experience. Wood's reflection on her journey from media darling to media target illustrates exactly why passive investing's steady, unnoticed approach often serves investors better than the celebrity fund manager roller coaster.

We Value Your Feedback!

Your opinion helps us improve and lets you suggest topics or ask Business English questions for future issues.

Expression of the Day: Fly under the Radar

Fly under the radar - expression - to avoid attention or remain unnoticed; to operate without drawing public scrutiny or media coverage.

Context and Usage: This military-derived expression originally referred to aircraft flying low enough to avoid radar detection. In business and finance, it describes companies, strategies, or investment approaches that perform well without attracting media attention or public fanfare. While active fund managers make headlines, passive investing typically flies under the radar despite often delivering superior long-term results.

Note: Flying under the radar isn't necessarily negative in investing - it often indicates a steady, reliable approach rather than flashy but potentially risky strategies that attract media coverage.

Business Example: While cryptocurrency funds dominated headlines, boring bond ETFs flew under the radar, providing steady income to conservative investors.

Investment Context: In finance, flying under the radar often characterises the most successful long-term strategies. Passive index investing, dividend-focused approaches, and value investing frequently deliver strong results without generating the excitement and media coverage that surrounds more speculative investment themes.

Interactive Quiz

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.