Firstly, indices outperform the majority of actively managed funds.
Indexing is an investment approach which simply tracks an index to provide exposure to a market or segment of a market. For the three reasons listed below, it may be a viable complement or substitute to actively managed investments.
Firstly, indices outperform the majority of actively managed funds. The SPIVA Australia Scorecard, which is published twice a year, tracks the number of actively managed Australian mutual funds that were outperformed by their comparable benchmarks over different timeframes. The year end 2013 SPIVA Australia Scorecard showed that benchmark indices outperformed the majority of their comparable actively managed funds over three- and five-year horizons. Similar findings are also observed in the U.S., Canada and Europe SPIVA Scorecards.
Secondly, winning streaks don’t often last. We observed that only very few Australian actively managed funds were consistent top performers. Out of 95 top-quartile-performing Australian Equity Large-Cap funds as of December 2009, only 3.2% managed to remain in the top quartile by the end of December 2013. In the US, less than 1% of domestic equity funds that began as top-quartile performers in March 2010 ended up in the top quartile almost four years later, as shown in the Persistence Scorecard published in June 2014.
Lastly, indexing generally offers lower costs, greater transparency and portfolio diversification. Index-linked products generally have lower management and administration fees and no commissions. There is also less turnover in ETFs than in most actively managed funds, resulting in lower trading costs and fewer taxable events, such as capital gains distributions. All of these reasons contribute to the cost of investing in an ETF being less expensive than the cost of investing in actively managed funds.
Compared to active funds, ETFs are typically more transparent as most ETF providers update ETF performance and constituent lists every trading day on their websites, whereas most actively managed funds only publish a selection of their holdings on a monthly basis. Indexing also provides more portfolio diversification as each index can track hundreds–even thousands–of securities, which reduces a portfolio’s dependence on single investments.
The author is Director, Index Research & Design, S&P Dow Jones Indices
Aug 06, 2022
Aug 06, 2022
Aug 05, 2022
Aug 05, 2022
Aug 05, 2022
Aug 05, 2022
Aug 05, 2022
Aug 06, 2022
Aug 06, 2022
Aug 06, 2022
Aug 06, 2022
Aug 06, 2022
Aug 06, 2022
Aug 06, 2022
Aug 06, 2022
The laws of the financial world are different from the physical world. You can have prolonged periods of time, when sanity takes a back seat and excesses happen.
R. Venkataraman Aug 20, 2021
Retail trading or day trading has exploded because of falling brokerage rates, democratization of information, higher transparency and mobile platforms.
R. Venkataraman Jun 15, 2021
My simple message for dear readers is, if you don’t have any desperate need for funds, then don’t do anything.
R. Venkataraman May 12, 2021
The blow up of a US hedge fund has resulted in WhatsApp university offering many courses on what went wrong with Bill Hwang and Archegos.
R. Venkataraman Apr 09, 2021
The expensive valuations have been sustained by strong rebound in corporate earnings which led to ~8% upgrade in FY22 Nifty EPS since October 2020.
R. Venkataraman Mar 26, 2021
We believe the interest rates are likely to have bottomed due to inflationary pressure, large government borrowings and normalizing credit growth. Hence rate sensitive sectors should be avoided in our view.
R. Venkataraman Feb 17, 2021
As markets make new highs, one gets more emails and messages, which highlight the accomplishments of traders who have found a formula for making money.
R. Venkataraman Jan 27, 2021
Data does not seem to convincingly prove that short periods of high returns are always followed by meagre returns. Only in 4 instances, we had negative returns in the subsequent year.
R. Venkataraman Jan 01, 2021
Since September end, Bankex is up 16% with large banks like ICICI Bank, Bandhan up 20-27%, Housing Finance Companies like Repco, LICHF, PNB Housing are up 50%-100% from their six-month lows.
R. Venkataraman Oct 13, 2020
Morgan Housel’s 'The Psychology of Money' explains in detail the role of human biases in investment decisions.
R. Venkataraman Sep 26, 2020
Per Order for ETF & Mutual Funds Brokerage
Per Order for Delivery, Intraday, F&O, Currency & Commodity