Are you paying active fees for a passive fund?

Subscribe to enjoy similar stories.There is a tendency to think of mutual funds in binary terms: either actively managed or passive index funds. In reality, it’s a spectrum. Some active funds diverge sharply from their benchmark, making concentrated bets the index barely touches.

Others look largely index-like, with only marginal differences.Both, however, charge active management fees. And disclosures rarely make that distinction obvious. So how do you tell what you are actually paying for?This is where active share comes in.

It puts a number on how differently a fund’s portfolio is constructed relative to its benchmark, helping you spot whether a fund is genuinely active or simply hugging the index.Active share is the percentage of a fund’s portfolio that differs from its benchmark by weight. If a fund mirrors the index exactly, its active share is zero, something no active fund would admit to. At the other extreme, a portfolio with no overlap would have an active share of 100, which is also rare.Most funds sit somewhere in between.A fund with 50% active share effectively overlaps half its portfolio with the index, while the rest is allocated either to different stocks or to the same stocks at meaningfully different weights.

The higher the number, the more the fund diverges from its benchmark. The lower it is, the more it resembles the index—regardless of how it is marketed.Consider a fund that holds Stock A as 10% of its portfolio, while that stock has a 40% weight in the benchmark. The absolute difference is 30 percentage points.