Neither index funds nor actively managed funds automatically protect you or perform better when markets are volatile. An index fund is built to track a benchmark, so it generally keeps that market exposure through declines. An active manager can change holdings within the fund’s mandate, but that discretion is an opportunity—not a guarantee of avoiding losses or beating the benchmark. The right comparison is between funds with similar objectives, categories, benchmarks, risks, and fees, not between labels alone.
How the two strategies differ
“Index” and “active” describe how a fund manages its portfolio, not whether it is an ETF or mutual fund. An index fund seeks to track a specified index. An actively managed fund has a manager who selects investments in line with the fund’s objective and may seek to outperform a benchmark. The SEC explains these approaches in its index-fund bulletin and mutual-fund guide.
| Question | Index fund | Actively managed fund |
|---|---|---|
| What guides its holdings? | A specified benchmark; the fund seeks to track it. | The manager chooses investments in line with the fund’s objective and mandate. |
| What can happen in a decline? | It generally retains exposure to the securities and risks of its benchmark. | The manager may reposition holdings, but the fund can still lose value and may underperform. |
| What is the key uncertainty? | How closely the fund tracks its benchmark after costs, trading, and any sampling. | Whether the manager’s decisions add value relative to an appropriate benchmark after costs. |
Do index funds fall when the market declines?
They can. An index fund is exposed to the securities it tracks, so it generally participates in their losses when those securities fall. Tracking an index does not mean preserving principal or stepping aside before a decline. The fund’s return can also differ from the index because of expenses, trading, or sampling, as the SEC notes in its index-fund bulletin.
The trade-off is that the fund is designed to follow its benchmark rather than make discretionary calls about when to leave or re-enter the market. If your priority is an exposure that behaves like a particular market segment, check that the index and the fund’s holdings actually represent the exposure you want; the name alone may not tell you enough.
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How do active funds perform in down markets?
An active manager can sell or change holdings within the fund’s mandate. That flexibility may help in some circumstances, but it can also lead to missed rebounds, different risks, additional trading costs, or returns below the benchmark. The result depends on the fund’s mandate and the manager’s decisions; discretion by itself does not establish downside protection.
Vanguard’s market-volatility Q&A says active managers’ discretion “can be really beneficial during market downturns.” That is Vanguard’s provider perspective, not proof that active funds consistently outperform or avoid losses in downturns. The SEC’s mutual-fund guide notes that active funds may underperform, and past performance does not predict future returns.
Volatility and a market decline are not the same thing
Volatility means prices move substantially; it can include sharp rises and falls. A market decline is a direction of movement. A market can be volatile without ending lower over a given period, and a decline need not unfold with dramatic day-to-day swings. A manager’s decisions during a decline therefore do not answer, by themselves, how a fund handles every kind of volatility.
When reviewing a performance comparison, identify the exact dates and conditions being measured. A result from one asset class, country, benchmark, or episode may not describe another. The sources cited here do not establish a matched-fund study showing which strategy had better downside outcomes across named volatile episodes after fees and survivorship bias are addressed.
How to compare two funds you might actually own
Compare funds that serve the same purpose, and use the prospectus and most recent shareholder report for current details rather than relying on a fund name or an old comparison. The SEC’s index-fund bulletin describes information to review in fund materials.
- Match the objective and exposure. Check the investment category, geography, stated objective, and benchmark. Decide whether the benchmark reasonably represents the market exposure you want.
- Inspect holdings and concentration. See what the fund owns and whether concentration or positioning changes its risks. Index sampling can make a fund’s holdings differ from every security in its index; active decisions can create different exposures from the benchmark.
- Compare performance over the same dates. Use equivalent periods and benchmarks, and examine drawdowns and volatility as well as returns. Where data allow, compare returns after ongoing fund costs. A record can describe what happened in that period, not forecast what will happen next.
- Read the full cost picture. Check the actual share class’s expense ratio, sales loads, transaction or brokerage costs, and other disclosed fees. For active funds, also check manager tenure and whether the record being considered reflects the current manager and stated strategy.
- Consider account and tax context. Review turnover and taxable-account implications, recognizing that tax results depend on fund structure, account type, and your circumstances.
- Separate the strategy from the wrapper. Confirm whether the fund is an ETF or mutual fund and understand how its shares trade; those mechanics are a separate decision from active versus passive management.
Fees matter in both approaches
Fees and expenses reduce returns. If two funds have identical performance, the lower-cost fund generally leaves the investor with higher returns, according to SEC guidance in its index-fund bulletin and mutual-fund guide. Compare actual fee disclosures rather than assuming every index fund costs less than every active fund.
Vanguard’s report, Setting the record straight: The truths about index fund investing, reports asset-weighted average expense ratios as of December 31, 2025, of 0.09% for index funds and 0.56% for active funds among U.S.-domiciled mutual funds and ETFs. The figures use annual-report net expense ratios and Morningstar data; they are averages, not quotes for any particular fund. The report also estimates that investors would have cumulatively paid roughly $570 billion in additional costs since 2000 in the absence of index funds. That is a hypothetical estimate based on the report’s assumptions, not a directly observed saving for each investor.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.ETF versus mutual fund is a separate choice
Either structure can use an active or passive strategy. ETFs trade on exchanges during market hours at market prices, which can differ from net asset value (NAV); mutual-fund shares generally transact at the next calculated NAV. Those are trading mechanics, not evidence that one management strategy will perform better during volatile markets. See the SEC’s guide to mutual funds and ETFs.
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SEC investor materials and Vanguard’s educational resources provide a basis for understanding the strategies, costs, and trading structures. They do not establish a universal winner for volatile markets or show that active funds consistently protect investors in downturns. Any meaningful performance comparison needs to specify the fund category, benchmark, geography, exact dates, share classes, fee treatment, and methodology. Historical volatility and performance describe the period measured; they are not a forecast of future returns.
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