Passive ETFs | Exchange traded products | Investment companies | Achievable SIE (2024)

FAQs

What are passively traded ETFs? ›

The primary objective of passive ETFs is to replicate the performance of a specific benchmark index or asset class without requiring active decision-making. Since there is no active manager trying to beat a benchmark, there is also often less of an administrative fee.

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

Passive ETFs are funds that purchase shares listed on benchmark indexes. They are popular among investors because they offer exposure to entire sectors or segments that many smaller investors could not fully access or mimic on their own due to costs. The funds have several advantages, but they also have disadvantages.

Active investments are funds run by investment managers who try to outperform an index over time, such as the S&P 500 or the Russell 2000. Passive investments are funds intended to match, not beat, the performance of an index.

For example, the most popular ETF is the S&P 500 “Spyder” ETF. Investors in this ETF make money when the S&P 500 rises, and lose when it falls. This is passive management, which avoids investing in only a limited number of stocks, bonds, or other securities within a market.

An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once. Investors buy shares of ETFs, and the money is used to invest according to a certain objective. For example, if you buy an S&P 500 ETF, your money will be invested in the 500 companies in that index.

SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.

As the ETF market has evolved, different types of ETFs have been developed. They can be passively managed or actively managed. Passively managed ETFs attempt to closely track a benchmark (such as a broad stock market index, like the S&P 500), whereas actively managed ETFs intend to outperform a benchmark.

What is the difference between active and passive ETFs? ›

While passive strategies lack the flexibility to adapt to changing market environments, active ETFs can offer the potential to outperform benchmarks and indexes. Plus, active managers with greater resources and greater scope benefit from economies of scale, which can often translate to better returns.

While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed. Active mutual funds are managed by fund managers.

Is Investing in the S&P 500 Less Risky Than Buying a Single Stock? Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.

Active strategies have tended to benefit investors more in certain investing climates, and passive strategies have tended to outperform in others. For example, when the market is volatile or the economy is weakening, active managers may outperform more often than when it is not.

Seeks to track the performance of the S&P 500 Index. Large-cap equity. Employs a passively managed, full-replication strategy.

How are they managed? While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed.

Since the SPY ETF is passively managed, the operational expenses to run the fund are extremely low. ETF fees are expressed as an expense ratio, which is a percentage representing a fund's assets used to pay its operating costs. The SPY ETF expense ratio is just 0.09%, which is $9 for every $10,000 invested.