Active vs. Passive Investing
What the evidence shows for Canadians.
The debate between active and passive investing is one of the most consequential questions in personal finance - and the answer has significant implications for how much wealth you accumulate over a lifetime of investing.
Active investing involves hiring a portfolio manager who makes deliberate decisions about which securities to buy and sell, with the goal of outperforming a market benchmark. Passive investing involves tracking a market index as closely as possible, accepting market returns in exchange for dramatically lower costs.
How Active Investing Works
An active portfolio manager conducts research on individual companies, analyzes economic trends, and makes judgment calls about which securities are likely to outperform. The premise is that skilled analysis can identify mispriced securities and generate returns above what the market delivers on average.
Active management commands higher fees - typically 1.5% to 2.5% MER for actively managed mutual funds in Canada - because it requires a team of analysts, portfolio managers, and traders to implement.
How Passive Investing Works
A passive investment strategy simply aims to replicate the performance of a specific market index, such as the S&P/TSX (Canadian large-cap stocks), the S&P 500 (U.S. large-cap stocks), or the MSCI World Index (global equities). Index ETFs and index mutual funds are the primary vehicles for passive investing.
Because no active research or security selection is required, passive funds carry much lower fees - typically 0.05% to 0.25% MER for index ETFs in Canada.
What Does the Evidence Say?
The SPIVA Canada Scorecard, published by S&P Dow Jones Indices, tracks the performance of actively managed Canadian mutual funds against their benchmark indices. The findings are consistent across time periods:
| Time Period | % of Canadian Equity Funds Underperforming the S&P/TSX Composite |
|---|---|
| 1 Year | Approximately 50% |
| 3 Years | Approximately 60% |
| 5 Years | Approximately 70% |
| 10 Years | Approximately 80% |
The longer the time horizon, the more difficult it becomes for active managers to overcome the compounding drag of higher fees. This is the central mathematical reality of active investing: to justify a higher MER, an active manager must not only generate higher gross returns but must do so consistently enough to overcome the fee disadvantage year after year.
When Active Management May Be Appropriate
Less Efficient Markets
In markets where information is less widely available - such as small-cap stocks, emerging markets, or certain fixed income segments - skilled active managers have historically had a better chance of generating excess returns.
Alternative Strategies
Certain strategies, such as absolute return, long-short equity, or private credit, are inherently active and have no passive equivalent. These strategies can play a role in a sophisticated portfolio as a diversifier.
Tax-Loss Harvesting
An active manager can strategically realize losses to offset capital gains, which can add meaningful after-tax value in non-registered accounts.
The SG Wealth Approach
At SG Wealth Management, we take an evidence-based approach to investment management. For the core of most client portfolios, we favour low-cost, broadly diversified index ETFs because the evidence strongly supports this approach over long time horizons. Where active strategies can genuinely add value - in specific asset classes or for specific tax management purposes - we incorporate them thoughtfully.
The goal is always to maximize your after-tax, after-fee wealth - not to generate activity for its own sake.
This evidence-based philosophy is central to our Investment Solutions offering. Explore our full range of ETF strategies to learn more.
Build an Evidence-Based Portfolio
We help you cut through the noise and focus on what the evidence shows actually works for long-term wealth building.
Book a free consultation to explore how our investment approach can work for you.
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