Passive management

Passive management is a management approach that aims to replicate as closely as possible the movements of a benchmark index. To do this, the manager can compose their portfolio of all the securities comprising the targeted index or use derivative products that allow them to achieve the index's performance.

Unlike active management, the manager does not rely on their convictions and experience to select securities for the portfolio; they replicate the index's composition and its weightings to closely track its performance, both upward and downward.

To guarantee the index's performance, the manager can choose between two techniques:

- Physical replication: the manager buys exactly the same securities that make up the index and in the same quantities to have similar weightings.

- Synthetic replication: the manager uses index derivatives, mainly futures contracts or asset swaps (over-the-counter exchange contracts). This technique helps reduce management fees by not physically holding the securities, although transaction costs remain.

ETFs (Exchange Traded Funds) are managed using passive management.