Have you ever browsed through a selection of managed funds and noticed how some offer significantly lower fees? Typically, the funds with the reduced fees are known as index funds or passive funds.
Over recent years, the popularity of index investing has surged, with major entities like Vanguard and Blackrock overseeing assets worth trillions (as of 2022).
Before exploring the reasons behind this trend and its implications, let’s clarify the two primary styles of investment:
So, what has propelled index investing to the forefront?
While opting for index funds may appear to be the sensible choice, it’s crucial to understand their foundation. Returns are derived from income (such as dividends) and the variation in capital value over time. However, for capital value changes to occur, there must be active trading of securities. If all investors were to solely invest in index funds, the market dynamics would fundamentally change.
Index investing does not discriminate between shares, providing investors with exposure to both ‘good’ and ‘bad’ companies without exclusions for environmental, social, or governance (ESG) criteria, which may be important to some.
In the debate between active and index investing, there’s no definitive answer. Many investors adopt a hybrid approach, using index funds or ETFs for broad market exposure and active investments for targeted areas such as smaller companies, real estate, or infrastructure.
Regardless of your investment strategy—be it active, indexed, or a combination—the essential principles of diversification and long-term market engagement remain pivotal in achieving wealth growth over time.
The information contained on this website has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial adviser to consider whether that is appropriate having regard to your own objectives, financial situation and needs.