Thursday, October 01, 2015

Should I invest in an ETF or an actively managed fund?

An exchange traded fund (ETF) or index fund is "passively managed". It is invested in the component stocks of a stock market index, such as the Straits Times Index in Singapore or the S&P 500 index in America.

An actively managed fund or unit trust is invested more actively according to the discretion and skill of the fund manager.

Here are some key points that you should be aware of.

a)  The annual charges in an ETF is about 0.3%. The annual charges for an actively managed fund could be 1% to 3%. The difference of 2% in the charges can amount to more than 20% for an investment that is held for 10 years. The difference will be much more, if the investment is held for 20 or 30 years.

b)  The active fund manager may claim that they can produce a better return than the market index as they use their judgment to pick the better stocks. However, independent studies have shown that this claim is not true. On average, the active fund managers performed worse that the stock market index (even before deducting fees) over a long period.  Some active managers may better better, but others perform worse. The average performance is worse than the market.

c)  The active fund managers may speculate and bet large sums on certain stocks. They may show a better return over the short term. When the market turns for these speculative bets, they will show a poor return. They are likely to sell the speculative bets at a bad time. This leads to a poorer return on average.

d)  Some dishonest fund managers may buy a few bad stocks for their funds. They pay a higher price than what the bad stocks are really worth. They may get hidden commission or bribes for buying these bad stocks. They will usually invest only a small portion of their funds in these bad stocks, so that the bad results are not obvious. But their funds will show a poorer return, than average, due to these bad stocks.

e)  An index fund or ETF is usually better diversified. It is invested in a more shares covering most of the sectors. The sectors may have their own cycles, but over the long terms, say 10 to 20 years, the cycles will average out.

To avoid the risks of investing in actively managed funds or unit trusts, I usually advice the ordinary investors to invest in an index fund or ETF. They do not need to spend time to select the capable, prudent or honest fund managers. They do not have reliable information to make the right selection.

Just invest in the ETF to enjoy low annual fees and better diversification and free of worry.


Anonymous said...

Insurance agents are superb active managers, the kind of gurus with a crystal ball in which are many gold fish.
Why insurance actively manage their clients' funds, ILPs and what not?
No need PhD to guess the correct answer, lah......
...C O M M I S S I O N!!! lah , stupid..
In MAS lingo it is known as churning.. Churning can hide behind so called switching, ie from one fund/ILP to another becuase of 'changed' economic 'outlook' aka prophesy/forecast or to take profit so that the agents can hope for another new business(new commission) down the road when the agents have a very good, cannot don't buy fund/ILP.
This is active management as far as insurance agents. This is the way to 'make money' for the clients and the clients believe them.

Anonymous said...

Ya, insurance agents are expert active ILP fund manager. To take profit means they are creating future business for themselves. If fund switches are not free this lagi best for them, means they can make more
MAS must regulate these active ILP investment experts before they ruin their customers' retirement fund.

Anonymous said...

NTUC agents are active managers. They are good at advising their clients when to buy and when to sell

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