How do index funds differ from actively managed funds?

Index funds passively track a market index like the S&P 500, automatically holding the same securities in the same proportions as that index. They require minimal human decision-making, which keeps costs low, typically charging expense ratios of 0.03% to 0.20%. Returns mirror the market's performance, minus those small fees. Actively managed funds employ portfolio managers who research and select investments trying to beat the market. This requires larger teams and more trading, resulting in higher expense ratios, often 0.5% to 1.5% or more. Despite these efforts, research consistently shows that most actively managed funds underperform their benchmark index over long periods, largely because the higher fees erode returns that might otherwise match or exceed the market.