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What changes when markets become volatile?
“Volatile” can describe rapid price swings, a sustained market decline, or both. They are not the same condition: prices can swing sharply without falling overall, and a market can decline without unusually large day-to-day moves. The distinction matters because a fund manager’s ability to reposition a portfolio may have different effects in each situation.
Index and active funds also have different aims. An index fund seeks to track a specified index; an active fund’s manager selects investments according to the fund’s objective and may try to outperform a benchmark. Neither label tells you exactly how much risk a particular fund takes. Its category, holdings, and mandate matter. See the SEC’s overview of index funds and its guide to mutual funds.
How the two strategies can behave in a volatile market
| Question | Index fund | Actively managed fund |
|---|---|---|
| What guides the portfolio? | It seeks to track a specified index. | The manager chooses investments within the fund’s objective and mandate. |
| Can holdings change in response to market conditions? | Holdings generally follow the index; the fund may have less flexibility to respond to price declines. | The manager may change holdings, but can do so only within the fund’s mandate. |
| Does the strategy prevent losses? | No. The fund is exposed to the risks of the securities it tracks and generally participates in benchmark declines. | No. Discretion may help in some circumstances, but does not ensure loss avoidance or outperformance. |
| What else can affect results? | Costs, trading, and sampling can cause returns to differ from the index. | Manager decisions, fees, and the possibility of underperforming the benchmark all matter. |
Do index funds fall when the market declines?
An index fund does not sidestep losses in its benchmark by design. If the securities it tracks fall, the fund will generally reflect that decline, although its return may differ from the index because of expenses, trading, or sampling. A fund’s benchmark is not necessarily the whole market, so check which index it follows and whether that index represents the exposure you want.
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#1 Best Overall
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Can an active manager respond to a downturn?
An active manager can sell or reposition holdings when the fund’s mandate permits. That could help in some market conditions, but a change can also be mistimed, add costs, or leave the fund less exposed to a rebound. Results depend on the manager’s decisions and expertise, and active management brings the risk of underperformance as well as the possibility of doing better.
Vanguard’s market-volatility Q&A says that active managers’ discretion “can be really beneficial during market downturns.” That is Vanguard’s perspective on a potential benefit, not evidence that active funds consistently protect investors from declines. The Vanguard Q&A should be read alongside the limits of any individual manager’s mandate and record.
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What the available performance evidence can—and cannot—show
There is no single answer to “How do active funds perform in down markets?” without specifying the asset class, category, benchmark, dates, share class, and treatment of fees. A useful comparison measures funds over the same period and against suitable benchmarks. It should include returns net of ongoing costs where data allow, and distinguish ordinary volatility from a market decline.
The sources cited here do not establish which strategy delivered better downside results for matched funds during specific volatile episodes after fees and survivorship bias are addressed. That is not a reason to assume the strategies performed equally—or that one universally won. It means a broad claim about a particular episode needs a clearly defined comparison. Past performance describes history, not a forecast; the SEC notes that it does not predict future returns in its mutual-fund guide.
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Compare specific funds before choosing
Fund names alone are not enough to tell whether two funds are comparable. Use the prospectus and most recent shareholder report to check the current strategy, risks, expenses, manager, holdings, and benchmark. For a fair comparison, work through these points:
- Objective, category, and benchmark: Compare funds with similar goals and exposures, and confirm that each benchmark represents the market segment you intend to own.
- Holdings and concentration: Review what the fund actually owns and how concentrated it is. An index fund may use sampling, while an active fund may take positions that differ from its benchmark.
- Risk over matching dates: Compare drawdowns and volatility over the same periods. Look at returns after ongoing costs when available, and note whether the period was a decline, a period of rapid swings, or both.
- All disclosed costs: Check the actual share class’s expense ratio, sales loads, transaction or brokerage costs, and other fees listed in the prospectus. Do not assume every index fund costs less than every active fund.
- Active-manager record: Check manager tenure and whether the manager’s history reflects the current strategy. A past record is not a guarantee of future results.
- Turnover and taxes: Consider turnover and the fund’s tax implications in light of the account type and your circumstances; tax outcomes depend on both.
- Fund structure: Determine whether the fund is an ETF or mutual fund separately from whether it is active or index-based.
Fees matter in either strategy
Fees and expenses reduce what an investor keeps. SEC guidance says that when two funds have identical performance, the lower-cost fund generally produces a higher return for the investor. The SEC’s index-fund bulletin also explains that costs can contribute to an index fund’s tracking difference.
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As of December 31, 2025, Vanguard reported asset-weighted average expense ratios of 0.09% for index funds and 0.56% for active funds among U.S.-domiciled mutual funds and ETFs. These figures, based on annual-report net expense ratios and Morningstar data, are category-level averages—not quotes for any particular fund or share class. Vanguard’s 2025 report also estimated roughly $570 billion in cumulative additional costs since 2000 in a hypothetical scenario without index funds; that estimate depends on the report’s assumptions and is not a directly observed saving for every investor. See Vanguard’s 2025 report.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.ETF or mutual fund is a separate decision
Active versus index describes how a portfolio is managed; ETF versus mutual fund describes its structure. Either structure can use an active or passive strategy. According to the SEC’s comparison of mutual funds and ETFs, ETFs trade on exchanges during market hours at market prices that may differ from net asset value (NAV). Mutual-fund shares generally transact at the next calculated NAV. Those trading mechanics do not determine whether the underlying strategy is active or index-based.
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How to decide which approach fits your plan
Start with the exposure and risks you want, not a prediction about the next bout of volatility. If you prefer a portfolio that tracks a chosen benchmark, an index fund is designed to provide that exposure, including its declines. If you are considering an active fund because you want a manager to adjust holdings, evaluate the manager, mandate, costs, and record without treating flexibility as downside protection. In either case, compare the actual funds on like-for-like terms and consider how each fits your overall portfolio and tolerance for losses.
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