What does "passive" actually do all day?
"Passive" sounds like nothing happens. In an index fund a great deal happens; it just happens on a schedule written by someone else, and knowing the schedule is worth money.
The rulebook is the manager
An index fund holds whatever its index says, in the index's weights. The index is a published rulebook: which companies qualify, how they are weighted, when the list is reviewed. The fund manager's job is to match it as closely as possible at the lowest cost — not to have a view. That is the whole meaning of passive: the decisions were outsourced to a rule, not that no decisions are made.
An active fund's manager makes the decisions instead, and charges for the judgement. The players lesson gave you the uncomfortable measured fact about how that judgement has performed after fees on average; this course does not repeat it, only notes that the fee difference the next unit measures is the reason it matters.
What the rule forces the fund to do
Rebalance on the index's dates. Most large equity indices are reviewed quarterly, with changes effective on a known Friday. Every fund tracking the index has to trade the same changes on or around the same day — the mechanical buying the players lesson described, with a date on it.
Buy what enters, sell what leaves. A company added to a major index is bought by every tracker, whatever any of them thinks of it. A company removed is sold the same way. The demand is real and it is predictable, which is why other traders position ahead of it and why the price move around an addition is mostly done before the effective date.
Reinvest and pay out on schedule. Dividends arrive from hundreds of companies on hundreds of dates; the fund pools them and distributes, quarterly for most US equity ETFs. Between distributions the cash is a small drag the manager works to minimise.
Handle the corporate actions. Splits, spin-offs, mergers and rights issues change the basket. Each one is a trade the fund did not choose and cannot avoid.
The weighting rule is the real choice
Two funds "tracking the US market" can hold the same five hundred companies and behave differently, because the weighting rule decides what one company's move does to the fund. The benchmarks lesson introduced the three families; here is what each does to a fund:
- Capitalisation-weighted: the biggest companies dominate, and the fund's concentration is the market's concentration. Measured on 2026-09-04, the ten largest positions in the S&P 500 tracker
SPY.UScarried 37.8% of the fund, the largest of them 8.1%. - Equal-weighted: every company gets the same slice, so the fund is tilted toward smaller names and has to trade constantly to stay equal — higher turnover, higher cost.
- Price-weighted: a share's price sets its weight, which is a historical accident the benchmarks lesson already called a fossil.
"Passive" is a spectrum, not a switch
Between a plain index fund and a stock-picker sits a wide band: funds tracking indices built from a rule about value, or momentum, or dividends. They are passive in execution and active in the rule they chose. The factor course, next in this domain, is about those rules. For now, the test is simple: ask who decided what the fund holds, and when they can change their mind. An index committee on a quarterly schedule and a manager on a Tuesday afternoon are different answers.
In the data
A fund's record names its rulebook and says how much of the portfolio it replaced in a year:
The index line is the rulebook. The turnover line, 2% for this fund on 29 September 2026, is what a quarterly review of a stable list costs in trading. An active fund's turnover is often ten to fifty times that, and every percentage point is trades the holders paid for.
Try it now
- From SPY's record above and its ten largest holdings below, read three things: the index tracked, the turnover, and the sum of the ten weights. You have just described a fund's rulebook, its trading and its concentration.
- Do the same for IWM, a tracker of two thousand small companies. Its record leaves the index name blank (28 September 2026), so the rulebook, the Russell 2000, has to come from the fund's own name. Sum its ten weights and set the total beside SPY's. Same word, "index fund"; a different animal.
- Look at the two side by side over the same five years and say which one the largest technology companies decided the shape of: