Passive management advances tirelessly. In Europe, 30.8% of the money in European equity funds is in this type of product. If there are 1,775 trillion euros in exchange-traded funds (ETFs), the number in active stock funds stands at 4 trillion, according to data from the latest Morningstar report.
Compared to traditional investment, passive management does not need a manager to analyze, select, buy (or sell) stocks or bonds , but rather these are limited to replicating the behavior of stock or debt indices. By requiring less dedication, one of the immediate advantages of passive management is its lower commissions. While the costs of traditional funds are around 1.83%, those of index funds are between approximately 0.2% and 0.3% per year, which undoubtedly ends up influencing profitability .
Among its benefits, there is also the diversification of the investment , since instead of selecting some companies it invests in all those present in an index. Regarding taxation, it is necessary to differentiate between the two faces of this type of investment: index funds and listed funds (or ETFs). While the former maintain the advantage of the absence of taxation between transfers, that is, when exchanging money from one fund to another, the latter do not retain this advantage and are assimilated to shares by having to pay a tax toll for the capital gains generated.
Regarding their performance, despite the fact that their objective is to replicate an index and not exceed it, as pursued by active management, in many cases the profitability of indexes manages to surpass many traditional managers .
According to Inverco, the average profitability at the end of August so far in 2021 of index funds stood at 7.32%, compared to that of total funds, which added 5.39%. At one year, the figure for index funds is 12.02%, compared to 9.45% for all funds. In longer terms, the indexes also manage to exceed the combined figure. Specifically, five-year liabilities are 3.15%, compared to 2.43% of the total, and 4.24% for 10, compared to 2.89%.
And the negative points?
But not everything is positive in the realm of passive management. If the indices they replicate go bad, the funds will also suffer falls. That is, if the Ibex 35 or the Eurostoxx50 fall and the fund in which we invest follows those indices, we will lose capital. Another of its negative points is the geographical risk, and even sectorial . An actively managed fund that invests, for example, in the United States will have technology, health, tourism, consumer goods or infrastructure companies. However, if we invest in a Nasdaq index fund we will only be positioned in technology companies in the United States. In everything, it is always convenient in one or another investment option to diversify our portfolio with several funds.
Another disadvantage of passive management is the lower product offering compared to traditional investment funds. Although the truth is that, fortunately, this is changing and more and more managers and banks offer index funds, and also platforms that allow or facilitate their contracting, such as Finect, MyInvestor, EBN Banco, Ironía Fintech or Renta 4 Banco .
Among the most profitable passive management funds so far this year to the end of August, according to Morningstar, the Lumyna – Merrill Lynch MLCX Commodity Enhanced Beta UCITS Fund stands out , with a yield so far this year of 30.60%, in the longer term it adds up to 7.57% at three years and 6.54% at five years. It is followed by the Amundi Index S&P 500 , with 26.47% until the end of August so far this year. At three years it advances by 16.46%, at five by 16.38% and at 10 by 17.47%. In three years, the list of the most profitable varies, with Bankinter USA Nasdaq 100 in first position with an increase of 24.22%. At five years it adds up to 23.61%. So far this year it contributes 19.81%.
In any case, as with active management, when investing in passive management it is essential to diversify, a task that is facilitated by automated managers or roboadvisors . Roboadvisors use algorithms to create different index fund investment portfolios that they combine with the supervision of a team of experts. Before investing, a test is always carried out on the user to determine their level of risk. At Finect you can compare and select the roboadvisor that best suits your needs.
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