investors can have expertise that enables them to select investments that do better than the market as a whole. Active management is more flexible than passive management. This flexibility has multiple benefits for investors: Active investors can tailor the risk of their investments to match their risk tolerance. For example, more conservative investors may want to adjust their portfolios to emphasize blue-chip investment. or they may plan to adjust the risk of their investments as their personal circumstances change. Investors can adjust exposures to reflect existing exposures. For example, employees of high-tech companies might wish to limit exposure to the stocks of high-tech companies in their investment portfolios. Similarly, active investors can emphasize income generation (from dividends or coupon payments) over capital appreciation. Active investors have the ability to time the sale of investments with capital gains for tax-planning purposes. Active investment enables investors to align their portfolios with their mission-based goals. For example, investors may want to emphasize companies with a lower carbon footprint or that follow certain practices with regard to diversity, equity, and inclusion. Disadvantages of Active Management The most obvious disadvantage of active management is that investment returns may be lower rather than higher. In addition, active management is generally more expensive than passive management. The higher costs are a result of the resources needed to evaluate investments and determine whether they should be bought or sold. Finally, active management is often less tax-efficient than passive management, because it may buy and sell investments more frequently and generate capital gains as a result. However, many active managers trade infrequently and, therefore, are tax-efficient. Use of Active Management Active management is the most common investment approach. For example, at the end of 2020, $14.8 trillion of U.S. mutual fund assets were actively managed, while only $4.8 trillion were passively managed. However, active management does not dominate in every category. For example, at the end of 2020, only $0.2 trillion of the $5.3 trillion in assets in 1940 Act exchange-traded funds were actively managed. Active Management and the Markets Active management plays an important role in maintaining market efficiency. Through the buying and selling of investments, active managers establish the market prices for securities. Therefore, an increase in the amount of active management will lead to greater market efficiency. Market efficiency is beneficial because it encourages broad investor participation in the market, it makes it easier for investors