ETF'S and Passive versus Active Investing

Active Management Recent Performance

90 percent of active stock managers failed to beat their index targets over the previous one-year, five-year and 10-year periods.

ETF (Exchange-Traded Fund)

A pooled investment vehicle (similar to a mutual fund) that offers investors a proportionate share in a pool of stocks, bonds or other assets. The key distinguishing feature is that it trades throughout the day on an exchange ( "exchange-traded") at a market-determined price, just like a stock and unlike a mutual fund.

Passive Management (Passive Investing)

A style of management associated with mutual funds and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index (S&P 500 Index). Also referred to as " index investing." The goal is not to beat the market, but to replicate the performance of an index as closely as possible.

Intraday Trading (ETF)

An advantage of an ETF in that they trade on stock exchanges. Investors can buy and sell them during trading hours. This feature gives investors instant liquidity and eliminates the need for them to wait until the end of the day to get filled on their orders.

Trading Flexibility (ETF)

Another advantage of an ETF is that since they trade on an exchange, investors can buy and sell them like regular stocks, using different types of orders such as limit orders or stop orders to get optimal pricing for their trades.

Active Manager Goal

Attempts to outperform or beat the market (S&P 500 Index)

Passive Management Advantage

Lower operating expenses and hence lower fees to the investor (Less trading is being done).

Active Management Advantage

The active fund manager may be able to outperform the index due to superior skill at picking stocks that will outperform.

Active Management (Active Investing)

The use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold and sell.

Active Management Disadvantage

They are expensive: The average expense ratio is 1.4 percent for an actively managed equity fund, compared to only 0.6 percent for the average passive equity fund. Fees are higher because all that active buying and selling (Trading) triggers transaction costs.

Low Costs (ETF)

They have lower management fees and expenses than mutual funds. Since they are exchange traded, this enables investors to acquire a diversified portfolio for a single commission.