Guide
Active vs passive KiwiSaver funds: what you're actually paying for
Some KiwiSaver funds pay a team of people to pick investments; others simply track a market index and keep costs low. The difference shows up in your fees every year and in your returns over decades — but the labels alone don't tell you which fund is better. Here is how each approach works, what it costs, and how to compare two funds on the things that matter.
Last checked October 2026
What 'active' and 'passive' actually mean
A passive fund (also called an index fund) aims to match the return of a market index — for example the NZX 50 for New Zealand shares or a global share index for international shares. It buys the investments in that index, in roughly the same proportions, and holds them. Nobody is deciding which companies to back; the fund simply owns the market.
An active fund employs managers and analysts who choose investments they believe will do better than the market. They might buy fewer companies, hold more of some and none of others, shift between shares and cash, or pick bonds they think are mispriced. The goal is to beat the index after fees.
Most real funds sit somewhere on a spectrum rather than at the extremes — a fund might track an index for its international shares but actively manage its bonds, or follow an index with tilts towards certain types of company. The fund's product disclosure statement tells you which approach it takes.
- Passive: tracks an index, low turnover, low fees, returns close to the market minus costs.
- Active: managers pick investments, higher research and trading costs, returns can be above or below the market.
- Hybrid: common in KiwiSaver — check the disclosure statement rather than assuming from the fund name.
What each approach costs
The clearest difference is the fee. Passive funds have no research teams to pay and trade rarely, so their annual fees are often a fraction of what active funds charge. Active funds charge more because stock-picking, analysis and frequent trading all cost money — and those costs come out of your balance whether or not the manager beats the market that year.
Over a long KiwiSaver horizon the gap compounds. A difference of around 0.8% a year on a growing balance can mean tens of thousands of dollars by retirement — which is why the fee deserves as much attention as the return figures.
| Low-fee fund at 0.3% | Higher-fee fund at 1.1% | |
|---|---|---|
| Annual fee on $40,000 | About $120 | About $440 |
| Balance after 30 years | About $463,000 | About $391,000 |
| Difference at retirement | — | About $72,000 less |
Do active funds beat passive ones?
Sometimes — and that honest answer is the point. In any given year some active managers beat their index and some don't. The hard part is that the winners change: research on managed funds repeatedly finds that most active managers underperform their benchmark over long periods after fees, and that past winners are not reliably the future winners.
That doesn't make active funds bad. A skilled manager can add value, particularly in less efficient markets or in asset classes like bonds and property where indexes are harder to replicate. It does mean the burden of proof sits on the higher fee: an active fund needs to outperform by more than its extra cost, year after year, just to match a cheap index fund.
What you can control is the fee, the risk level and how well the fund fits your timeframe. What nobody controls is next year's market.
- Compare returns after fees — the figures providers publish already are.
- Look at 5 and 10-year returns, not last year's winner.
- A fund that beat the market last year may have just taken more risk — check what it holds.
- Consistency over a full market cycle matters more than one strong quarter.
How to compare two funds fairly
Active-versus-passive is the wrong first question. The right first question is whether the two funds take the same amount of risk. A growth fund will almost always beat a conservative fund in a strong market, whatever its investment style — that tells you nothing about the manager.
Once you're comparing like with like, the comparison gets simple.
- Same risk band first: compare growth with growth, balanced with balanced. The fund type label tells you the mix of shares versus cash and bonds.
- Fees: the total annual fund charge, in percent. This is certain; returns are not.
- Long-run returns: 5 and 10-year average annual returns after fees, not the latest quarter.
- What it holds: an 'active' fund whose top holdings mirror the index may be charging active fees for passive results — sometimes called a closet index fund.
- Who's behind it: ownership, size, and whether the provider's approach is stable or changes with every market fashion.
Where passive tends to shine — and where active can earn its fee
The case for passive is strongest in large, heavily researched markets — big US and global companies — where thousands of professional analysts are already competing to find an edge, and beating the market consistently is hardest. The case for active is stronger where markets are smaller or less efficient, where the index itself is concentrated in a few companies, or where you want something an index can't do — like screening out certain industries.
New Zealand's share market is a good example of the index problem: a handful of large companies dominate it, so a passive NZ fund is heavily exposed to those few names whether the manager likes them or not.
- Ethical or responsible investing is inherently active — an index owns everything, including the companies you might want excluded.
- Bond and cash funds are often actively managed even in otherwise passive schemes.
- Some active funds genuinely differ from their index; check the top-10 holdings against the index to see how different it really is.
What this means for your own KiwiSaver
You don't have to pick a side. Most KiwiSaver members are best served by getting the big decisions right first — the right risk level for their timeframe, contributions high enough to capture the employer match and government top-up, and a fee that isn't quietly eating the returns. Whether the fund then tracks an index or employs a stock-picker is a second-order decision.
If you do want to choose, a practical rule: let the fee justify itself. A passive fund asks almost nothing of you. An active fund charging 1% more needs you to believe its manager will beat the index by more than that, after fees, over your whole horizon — and the fund's own long-run record is the best evidence you've got.