Index Funds / ETFs

A fund can be passively or actively managed. Where a fund is actively managed, it means that a fund manager is picking stocks. She is not just following an index but deciding herself how much, how little and which stocks to buy. For this she charges a management fee as well as fund expenses and so actively managed funds can charge anything from 1% to 2% of your investment annually. So for every EUR100 you invest, she is potentially taking EUR2 regardless of whether she performs well or not. While there is a place for actively managed funds (and those are the fund I primarily work on), the consensus is that for the every day investor, index or passive funds are a better option.

So what is a passive or index fund? Well an index is a group of stocks that represents a particular market segment. For example the S&P 500 index measures the stock performance of 500 large companies which are listed on stock exchanges in the US. So when you invest in an index fund/ETF or passive fund that tracks the S&P 500 you are effectively tracking the performance of those 500 stocks. In Europe we have the FTSE 100 (the 100 largest companies listed on the London stock exchange) , DAX 30 (German index listing the 30 largest companies that trade on the Frankfurt stock exchange) and CAC40 (the 40 largest stocks on the Euronext Paris stock exchange).

Passive/ETFs/Index funds are low cost as there is no active management required so fees are around 0.10% to 0.60% so a huge difference to active funds. Research has also stated that index funds perform better than active funds around 80% of the time, so you get a better bang for your euro.

So if you have a portfolio already, check whether the funds you are investing in are active or passive. And if you haven’t started investing, then passive index funds are a fantastic, low cost, diversified first place to start. And if you want to check out some asset managers who do index funds well, take a look at Vanguard and Fidelity. Again I am not an investment adviser and so am here to educate and we will be looking at index funds in more detail when the bootcamp ends as it’s a pretty big topic.