What is a passively managed fund?

FUND

Passively managed funds are a pool of investment instruments that rarely change, as they track an established benchmark such as the S&P 500. Passively managed funds do not try to beat the market like actively managed funds.

Learn more about passively managed funds and how you can use them in your portfolio.

Definition and examples of passively managed funds

A passively managed fund does not require any active management such as removing or replacing non-performing investments. In these funds, the manager(s) typically buy and hold securities so that the fund matches the performance of a benchmark index.

  • Alternative Name:  Index Fund

For example, the Vanguard Growth Index Fund Admiral Shares (VIGAX) tracks the CRSP US Large Cap Growth Index. VIGAX has 265 stocks including Apple, Microsoft, Google and other well-established companies. Because it buys stocks listed on an index, the fund does not require active involvement unless the index changes.

How passively managed funds work

An investment fund is a company with a management team. The team selects an index to follow based on the fund’s strategy and goals, buys stocks or other investments that make up the holdings, and offers shares of the fund to investors.

The fund manager(s) will follow the index or strategy and not use their discretion in investment selection, as the index or strategy dictates the holdings. Once a fund is established, it essentially operates on auto-pilot unless the index changes.

It is important to note that most passively managed funds track an index. That is why they are also known as “index funds”. 

Due to their almost unregulated nature, passively managed funds have lower expense ratios and lower capital gains distributions. That translates into greater tax efficiency for the investor than actively managed funds.

What it means for individual investors

Because passively managed funds almost always track an index, you follow several standard investment mantras:

  • Diversify your portfolio
  • Invest in what you know
  • Don’t chase performance
  • Don’t be sentimental

Passively managed funds minimize risks, as they follow market benchmarks designed by leading analysts. Because you’re investing in a fund, you’re getting exposure to all the holdings within that fund – many of which will be familiar companies.

Index funds diversify your portfolio and reduce risk at the same time—they also eliminate the urge to succumb to your emotions, as most of the companies in the index have made it through multiple economic crises and market fluctuations.

Types of passively managed funds

There are many different types of passively managed funds. Stock index funds are the most well-known, but many different categories of funds use stock indexes based on factors such as market capitalization or sector. Here are a few examples.

Stock index funds

The S&P 500 is a popular benchmark for many funds. An index fund that tries to replicate the returns of the S&P 500 will hold stocks (or most stocks) within the S&P 500. Other stock index funds may track the Dow Jones Industrial Average, Russell Series (1000, 2000, 3000). , 5000), or other stock index.

Bond index funds

A bond index fund tracks an index that includes bonds. For example, the Bloomberg Aggregate Bond Index and the S&P US Aggregate Bond Index list bonds hand-picked by experts at Bloomberg and Standard & Poor’s. For example, brokerages such as BlackRock offer bond funds such as the iShares US Aggregate Bond Index Fund, which tracks the Bloomberg Aggregate Bond Index.

Market Capitalization Funds

Market capitalization funds may track an index considered a stock market benchmark, such as the S&P 500, but they will track the index based on the market cap of the companies in the index. For example, the S&P 500 is a large-cap index, while the S&P 400 is a mid-cap index. The Russell 2000 is an index of small-cap stocks. 7

Sector Fund

Sector funds focus on specific sectors such as energy, healthcare, consumer staples or financials. For example, the MSCI ACWI Energy + Utilities Index is used by Vanguard in its energy fund Admiral Shares.

Are passively managed funds worth it?

Passively managed funds have lower carrying costs, as no fund manager makes decisions about where to invest money. It will work just like the underlying index. In 2021, passively managed funds were prevalent despite gains by actively managed funds. According to the Morningstar Active/Passive Barometer, 45% of active funds have outperformed their passive peers, meaning 55% of passively managed funds outperform actively managed funds. 

Passively managed funds can be a good choice for conservative investors who don’t want to beat the market because of performance and low fees.

Balance does not provide tax, investment or financial services and advice. The information is presented without regard to the investment objectives, risk tolerance or financial circumstances of any particular investor and may not be appropriate for all investors. Past performance is not indicative of future results. Investment involves risk, including possible loss of capital.

What is a passively managed fund?

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