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Investing in indexed funds is one of the investment trends in 2021. The simplicity of its investment philosophy, lower barriers to access, and a much more accessible cost structure than traditional funds, make indexed funds one of the most popular products among new investors on opinionesespana.es and even among those more experienced.
The indexed funds are here to stay, and the largest offer in Spain is proof of this. Not only are these funds traded with the fund portfolios of automated administrators or robot advisors, but several entities already offer them among their range of passive management products.
What is an index fund
An index fund, also known as an index fund, is an investment fund whose objective is to replicate the behavior of a certain stock index, be it the Ibex 35, S & P500, or MSCI World, among others. Before you begin this journey into this complex industry, consult finizens for helpful tips and guides.
The investment philosophy of index funds is based on passive management, a way of investing that requires less activity from the management team and therefore involves lower costs for the investor. This lower activity is because indexed funds base their investment model on the replication of stock indices and seek to capture both their increases and decreases to the same extent, instead of exceeding them, as happens in passive management. However, on many occasions, the behavior of these funds may differ slightly from their reference asset.
Index fund is the same as an ETF?
When it comes to investing in passively managed funds, it is necessary to differentiate between indexed funds and ETFs, as they are different products. The problem is that many investors do not see the difference, because both are trying to reproduce a certain index.
However, operations and performance differ between indexed funds and ETFs (exchange-traded funds). The premiums operate like a traditional investment fund, i.e. they are subscribed and repaid in the same way as the rest of the funds. In the meantime, ETFs function as stock, so they can be bought and sold at any time.
Important Advantages and disadvantages of investing in indexed funds
Investing in indexed funds in 2021 can be a good alternative to low-cost betting. However, not all benefits. Here are some of the advantages and disadvantages of indexed funds:
The advantages of indexed funds
- Savings on commissions. Because indexed funds do not require ongoing work from a management team, fees for these products are much lower.
- Diversification of investments. Investing in an index fund involves betting on a specific index that includes several companies, sectors, or geographical areas.
- Taxation. Taxation is another point in favor of indexed funds because, like traditional investment funds, they allow transfer without paying capital gains tax.
- Positive behavior. Although the strategy of these funds is to reproduce a certain index, this does not mean that the result is worse than that of actively managed funds, which are trying to exceed the indices.
Disadvantages of indexed funds
- The risk of misbehavior of indices. Indexed funds follow benchmarks and, therefore, if these indices fall, the fund’s performance will be significantly affected.
- Geographical risk. Although diversification is one of the advantages of index funds, as they allow exposure to an entire market, there is some geographical risk.
- Product offer. Another disadvantage of this is the lower existing offer compared to traditional investment funds.