Passive Investing - Explained
A beginner-friendly explanation of Passive Investing in value investing.
Passive Investing Explained
Investment strategy that tracks market indices rather than making active stock selection, now representing over 50% of global AUM and causing significant market distortions
What It Means for Investors
Definition
Passive investing is an investment strategy that tracks a market index (such as the S&P 500 or FTSE 100), aiming to match its performance rather than outperform it. Unlike active management, passive funds do not select stocks based on fundamentals, valuation, or quality assessment. As of 2023, passive funds represent over 50% of global assets under management.
The Paradox of "Passive" Investing
Terry Smith at Fundsmith's 2025 AGM offered a counter-intuitive perspective:
"Index investing is only passive in that there's no fund manager involved — it's actually a momentum-based strategy. Money going into index funds is allocated based on market weight, meaning the biggest companies get most of the inflows, boosting their share prices further."
Key Takeaway
Investment strategy that tracks market indices rather than making active stock selection, now representing over 50% of global AUM and causing significant market distortions