Does the name passive investing hold better investing back?
- Robin Powell
- Aug 26
- 7 min read
We call it passive investing — but that single word, passive, may be turning people off a strategy that lowers costs, reduces regret, and improves outcomes. The evidence on framing says language matters. Here’s how we can fix it.
Words matter more than we admit
Think of the difference between “low fat” and “90% lean”. Or “estate tax” versus “death tax". Same thing, different words, very different reactions. Framing effects like these have been tested repeatedly in psychology and economics: language nudges behaviour.
So it shouldn’t surprise us that one word has been quietly distorting investor choices for decades: passive.
Charley Ellis, the veteran observer of the fund industry and long-time champion of indexing, recently voiced his frustration with the term. Nobody wants to be described as passive at work or at home. Why should investors embrace it in their portfolios? “If it always had been called index and never, ever used the word passive, I would bet we’d be at least 50% more investing in indexing,” Ellis argued in a recent interview.
It’s a sharp reminder that semantics aren’t just semantics. If a word can hold back healthier eating or tip an election, it can also slow the adoption of evidence-based investing.
“If it always had been called index and never, ever used the word passive, I would bet we’d be at least 50% more investing in indexing.” — Charley Ellis
Passive: an unhelpful label
In the investment industry, “active versus passive” has become the default framing. Journalists use it, advisers use it, even regulators. But it’s a loaded pairing. “Active” suggests energy, effort, and initiative; “passive” hints at apathy and defeat.
That bias is unhelpful because the data tell a very different story. Most actively managed funds fail to beat their benchmarks after costs over meaningful periods (S&P Dow Jones Indices, 2025; Morningstar, 2025). Those that do succeed rarely repeat their success (Carhart, 1997; Fama & French, 2010). Yet the “active” label still makes the strategy sound preferable before a single return number has been presented.
For investors already frustrated at paying high fees for lacklustre results, the language compounds the problem. Why choose “passive” if it sounds like giving up?
What the research says about labels
A growing body of academic work confirms Ellis’s hunch: labels change choices.
Adjectives and fund selection. Experimental studies show that investors are swayed by descriptors like “aggressive” or “transparent”. These adjectives shift perceptions of skill and justify higher fees, even when the underlying product is identical (Beshears et al., 2021).
Fee framing. Presenting charges as percentages versus pounds or dollars triggers the “peanuts effect.” Small percentages feel trivial, so investors underestimate costs. In lab settings, reframing fees in currency terms led participants to allocate less to expensive funds (Barber et al., 2021).
Loads and branding. Terms like “back-end load” evoke stronger aversion than “deferred sales charge,” even for identical structures. And the mere presence of a trusted brand name on an index boosted flows, regardless of cost (Merton & Bodie, 2005).
ESG and virtue signalling. Adding an “ESG” label drew inflows even when performance was unaffected. The label itself created perceptions of both higher responsibility and higher expected return (Hartzmark & Sussman, 2019).
Index versus active clarity. When researchers provided retail investors with plain side-by-side comparisons of active and index returns and fees, portfolio choices shifted decisively toward index funds (Choi, Laibson, & Madrian, 2010).
The through-line: language influences perception, and perception influences allocation.
When passivity is strength
There’s also a deeper irony. Being passive can be a very good thing.
In life, restraint is often the wisest move: not reacting in anger, waiting patiently for test results, absorbing ideas before rushing to judgement. The same principle holds in traffic jams and in learning new skills. Inaction, acceptance, and receptivity are strengths when the alternative is rash, stressful, or counter-productive.
In investing, those qualities are invaluable. Research consistently finds that frequent trading hurts returns (Barber & Odean, 2000). Morningstar’s Mind the Gap study shows that investors cost themselves one to two percentage points a year by buying high and selling low. Indexing, by design, reduces that temptation.
Ellis put it neatly: “Index investing is boring. Being boring is wonderful because… you’re left alone to do whatever you do. And index investors fall right into that pattern of behavior.”
So while “passive” sounds like weakness, in practice it fosters the behavioural discipline most investors desperately need.
Beyond passive: evidence-based investing
Personally, I’ve never minded the word “passive.” There are many contexts where being passive is wise. But I also prefer a broader, more accurate description: evidence-based investing.
EBI covers both traditional index funds and systematic, factor-based strategies. Both are rules-driven, cost-controlled, and grounded in decades of peer-reviewed research (Fama & French, 1993; Ilmanen, 2022). Both stand in contrast to the speculative guessing and high-fee marketing of much of the active fund industry.
Crucially, evidence-based investing reframes the choice. Instead of “settling for average,” investors are actively deciding to capture the return that most active managers, on average, fail to deliver.
This is not passive. It’s a deliberate, disciplined commitment to what works.
The paradox of activity
The paradox, of course, is that all investing involves an active decision. Choosing an index fund is active. Deciding to do nothing during market turmoil is active.
Behavioural finance helps explain the gap. Investors crave action because it feels like control. But the most effective control often comes from designing a process that removes our impulses from the equation — automating contributions, sticking to a rebalancing plan, ignoring forecasts.
As Ellis has long argued, investing is a “loser’s game.” The winner is not the player who makes the most brilliant moves, but the one who avoids the biggest mistakes (Ellis, 1975/2016). Labels that glorify activity make mistakes more likely.
Visualising the choice
A simple graphic tells the story.
Gross market return: what’s available to everyone.
Index after low fees: the market return, minus a sliver of cost.
Typical active after fees + behaviour gap: lower than the market because costs and poor timing drag results down.
Most investors land in the third bar. But it’s the second bar—boring, rule-bound, “passive” — that builds wealth most reliably.
Practical steps for reframing
How can we change the conversation?
For advisers: Replace “passive” in client materials with “index” or “evidence-based.” Test which terms resonate. Present fees in both percentage and currency terms. Explain that “boring” is a feature, not a flaw.
For institutions and regulators: Standardise naming conventions. Avoid pejoratives in official reports. Mandate fee disclosure in plain pounds and percentages. Make fund fact sheets comparably clear.
For retail investors: Don’t be put off by labels. Look for “index” or “tracker” in fund names, check all-in costs, and beware any product that relies on adjectives like “aggressive,” “dynamic,” or “smart.”
So what should we call it?
Better options already exist:
Index investing / tracker funds. Neutral and factual.
Rules-based / systematic. Signals discipline and repeatability.
Evidence-based. Anchors decisions in research rather than salesmanship.
None of these carry the baggage of “passive.”
Conclusion: let’s debate the word
Words are free. Outcomes are not. If reframing “passive” as “index” or “evidence-based” helps more people lower costs, diversify better, and stay invested, why wouldn’t we?
At the same time, let’s not lose sight of the paradox. Passivity in investing, as in life, can be a profound strength: staying calm in a storm, waiting when control is impossible, listening rather than reacting.
The word may be imperfect, but the discipline it points to is invaluable.
What do you think? Should we retire “passive investing” in favour of something clearer, or is it a word worth defending? This is a debate everyone who cares about investor outcomes needs to have.
References
Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. Journal of Finance, 55(2), 773–806.
Barber, B. M., Odean, T., & Zheng, L. (2021). Out of sight, out of mind: The effects of expense disclosure on mutual fund flows. Review of Financial Studies, 34(5), 2604–2638.
Beshears, J., Choi, J., Laibson, D., & Madrian, B. (2021). How does simplifying disclosures affect choices? Evidence from mutual fund selection. Journal of Finance, 76(2), 709–750.
Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52(1), 57–82.
Choi, J., Laibson, D., & Madrian, B. (2010). Why does the law of one price fail? An experiment on index mutual funds. Review of Financial Studies, 23(4), 1405–1432.
Ellis, C. (1975/2016). Winning the loser’s game (7th ed.). McGraw-Hill.
Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.
Fama, E. F., & French, K. R. (2010). Luck versus skill in the cross-section of mutual fund returns. Journal of Finance, 65(5), 1915–1947.
Hartzmark, S., & Sussman, A. (2019). Do investors value sustainability? A natural experiment examining ranking and fund flows. Journal of Finance, 74(6), 2789–2837.
Ilmanen, A. (2022). Investing amid low expected returns: Making the most when markets offer the least. Wiley.
Morningstar. (2025). Active/Passive Barometer.
S&P Dow Jones Indices. (2025). SPIVA U.S. Scorecard.
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