Active management means that an investment fund manager compiles an investment portfolio, using his or her own judgment, and then makes strategic changes in that portfolio within the framework of the fund. These changes are aimed at helping the fund outperform the benchmark and other comparable funds. Active management can be successful, of course, but it can also have unfavorable results.
By comparison, passive ETFs are only designed to track a specific index. When an ETF tracks a specific index, it includes the most representative and most actively traded shares in that particular market, sector or region. In practice, it is difficult to outperform an index on a consistent basis. Passive management consists of administrative activities such as processing dividends, implementing share splits and ensuring the portfolio always corresponds to the reference index.
Because they generally change less than an actively managed fund, transaction costs at a passively managed ETF tend to be lower than those at actively managed funds.