Passive management and index funds do not stop ringing in the media and on social networks and it seems that more and more people are encouraged to invest with them. However, it is normal for us to have doubts such as what their characteristics are or whether passive management implies having less profitability, since they are also unknown products for many investors. The first thing we have to do before investing is to inform ourselves, so in this article we explain what key points we must take into account and if their profitability is worse or not than actively managed funds.
What is an index fund and what advantages does it bring me?
Passively managed funds or index funds are those that try to replicate an investment index. Index mutual funds try to achieve the same returns as the indices they mimic, such as the IBEX 35 or the S&P 500 in the United States. They do so by proportionally buying the shares or bonds that form it. Also are called passively managed funds, since the manager has much less intervention than in actively managed funds, that is, those that the bank usually offers us.
The main advantages of index funds are that they have lower commissions than investment funds with active management, since in the latter the manager has to intervene more. In addition, index funds are easy to understand because to know their behavior we just have to check how’s the benchmark going. Finally, the rule that we must to diversify investing is met with this product. Unlike if we put the money in a single share, with the risk that it entails, with an index fund our money will be diversified, since the fund will invest in many different assets. Of course, we must be vigilant in the case of index funds to sector indices …
Index funds gain in profitability
If the fund has less management, does it mean having less profitability compared to one of active management? According to the April report published by Inverco on the returns of investment funds in Spain, the return on index or passively managed funds is higher than the fund pool. For example, so far in 2021, the average return for index funds is 4.35 and that of total funds is 2.97. At one year ahead, the figure for index funds is 13.38 and for the group of funds, 11.19 and after five years, index funds are 2.75 and the group of funds, 2.18.
What do these data mean? What Investing in index funds does not mean having less return for our money. By investing in passive management we can expect profitability figures that need not be worse than actively managed funds.
How to hire an index fund?
Hiring an index fund is possible in several financial entities, such as banks, brokers or the robo advisors. The latter are a way of investing that gains more clients each time and that mixes the experience and decisions of a committee of investment experts with technology, used to automate some investment processes. With a robo advisor we can hire a index fund portfolio, that is, a pool of about six or seven funds, with the advantage that we will have to pay low commissions. In addition, robo advisors offer advice so that we can choose which of the investment portfolios they offer best suits our profile as an investor, based on our ability to take risks.
Examples of robo advisors are Indexa Capital, Finizens and inbestMe, the three leaders in the sector. Indexa Capital It stands out for being the robo advisor with the most clients in Spain; Finizens, for rewarding the loyalty of its customers by lowering commissions year after year; and inbestMe, for offering, among its products, index funds with ethical values and care for the environment.