Active tactics are out in the cold

Has managed funds’ day in the sun finally come to an end as investors turn to index funds and ETFs?

- DAVID THORNTON

You have money to invest in the stock market and you want it invested professionally. Do you put it in managed funds that may outperform the market but probably won’t, or in passive funds that move with a given market benchmark?

There was a time when active fund managers had it good. The value proposition was simple: you pool your money with other investors’ funds, which is then invested by professional portfolio managers whose expertise – it’s hoped – generate superior returns.

“By pooling in with others, retail investors get scale advantages,” says Alex Dunnin, director of research at Rainmaker Information, which publishes Money. “It’s a killer-app of an idea.”

Then along came exchange traded funds (ETFs), which are passive, low-fee listed securities that hold a basket of stocks that mirror an index. They’ve proven hugely popular, especially with younger investors. According to ETF provider BetaShares, the number of investors using ETFs in Australia rose 58% in 2020, from 455,000 to 720,000, while almost two-thirds of investors entering the market between March and August 2020 were millennials (aged 25 to 40) or the younger gen Z.

“The fact that investors, particularly younger ones, continued to invest in ETFs throughout 2020 suggests that not only are investors attracted to the liquidity ETFs offer in volatile markets, they also appreciate a simple, cost-effective way to diversify portfolios and minimise single stock risks,” says Alex Vynokur, CEO of BetaShares.

If index ETFs do their job, they won’t outperform the market. But at least they’ll match it (before fees).