Over the last few sessions, we compared active asset management with a passive investing strategy. There are many reasons why passive investing may be preferable for most individual investors. If you are going to passively invest, then what type of investments should you purchase? Suitable investments tend to be low-cost, index mutual or exchange traded funds.
All that and more in Episode 40 on the Wilson Wealth Management YouTube channel.
“Are all mutual funds actively managed? Are there any passive index funds?”
Yes, there is an increasing quantity of passive index mutual funds on offer. In large part driven by the fact that investors are realizing that passive management tends to be the better strategy.
If you wish to invest via a fund company, you should be able to find passive index funds across a wide swathe of asset classes and subclasses.
“Should I pay a sales commission when buying an index mutual fund?”
No.
There are so many index mutual and exchange traded funds (ETFs) available, that it is hard to think of a situation where paying a front/back/declining load is warranted.
Passive investing is about minimizing costs. Paying commissions to purchase funds runs contrary to that.
“What about Management Expense Ratios (MERs)?”
As with loads, you want to minimize costs.
Studies show that low cost is a major predictor of future performance success.
When buying the index, look for the lowest cost funds. That said, there is more to a fund’s “cost” than just loads and MERs. There is also the cost of poor fund construction. The tracking error that results between the fund returns and the benchmark return. If your fund is lowest cost because it saves money with weak replication of the benchmark in the fund, that also needs to be assessed as a cost.
“How do ETFs compare with open and closed-end mutual funds or common shares?”
A quick refresher on the different types of investment funds.
I tend to like ETFs over mutual funds. But that may be more due to living in Western Canada.
Historically, Canada has “enjoyed” some of the highest mutual fund fees in the developed world. Also, the mutual fund market was relatively small in Canada versus other developed countries. Add in the growing number of high-quality, low-cost ETFs introduced in Canada over the last decade or so, and ETFs usually are the best passive funds where I work. Your own experience may differ.
