Investment Research

Active, passive and the rise of index thinking

17 February 2025 · 6 min read

For most of investing history, the default was active management: a professional choosing holdings in the hope of beating the market. Over the last two decades, a quieter idea has reshaped the landscape: the notion that simply owning the whole market at low cost is hard to beat over the long run has moved from the fringe to the mainstream.

What the shift is really about

Index investing grew not because active management stopped trying, but because cost and consistency turned out to matter enormously over long periods. Fees and the breadth of holdings are known in advance, whereas future outperformance is not, and the published research on how often active funds beat their index over long periods is what drove the shift. That trade-off, rather than any single product, is the heart of the change.

The catch in the label

Passive does not mean safe, and index does not mean simple. An index fund still rises and falls with its market, and there are now thousands of indexes, some broad and cheap, others narrow, exotic and expensive dressed up in passive clothing. The word on the label tells you far less than what the fund actually holds and what it costs.

Not a religion

It would be a mistake to treat this as a settled war with a single winner. Both approaches have a place, and the right mix depends on goals, costs, tax, time horizon and temperament. The useful lesson from the rise of index thinking is not to pick a side, it is to take costs, diversification and your own behaviour seriously, whatever you ultimately choose.

This is general information and education only. It does not take account of your objectives, financial situation or needs and is not personal financial advice. GBX Professional Services does not hold an Australian Financial Services Licence. Consider speaking with a licensed adviser before acting on anything here.