An index fund is an ETF (exchange-traded fund) or mutual fund that tracks a benchmark—a standard or measure that reflects a specific asset class. The fund is designed to act just like the benchmark it tracks, and for this reason, index funds are passive funds. If a fund’s benchmark goes up or down in value, the fund follows suit.
An active fund is an ETF or mutual fund that’s actively managed by a fund advisor who chooses the underlying securities that comprise the fund with the goal of outperforming a specific benchmark. If a fund advisor picks the right mix of securities, the fund may outperform the market. But there’s always the risk that poor security selection will cause the fund to underperform the market.