Glide Invest FAQ: Why are index funds popular in other parts of the world?

Why are index funds popular in other parts of the world?

Index funds are considered as ideal for constructing a core portfolio for long term wealth creation due to their diversification benefits, low cost and low portfolio churn. Globally, Index funds are popular due to the following reasons –
  1. Easy - Index funds are simple to understand and track, as they usually track the broad-based indices that are publically available. Further, the index values and composition is generally publically available, which helps investors know exactly their portfolio holding at any point in time. Unlike active funds, investors don’t have to fret over with fund’s under-performance, or the fund manager’s stock/sectors selection style, before making an investment decision.
  2. Economical – Passive funds don’t need an active decision in terms of stocks or sector selection which reduces the overall expense ratio as compared to active funds. TER of passive funds typically ranges between 0.05% and 0.50% which is considerably lower than active funds.
  3. Effective: Index funds generate benchmark returns after deducting for fees and expenses. There is no risk of underperformance or outperformance and removes any emotional bias from investments making it easier to stay invested for a longer term which ultimately leads to wealth creation. Further Index Funds helps in achieving effective asset allocation in the portfolio, since they generally don’t deviate/drift from risk mandate, for example in Large-cap, mid-cap or small-cap Index Fund would always include respective size category of stocks, and periodic index rebalancing will help realign the size exposure of the fund. 
  4. Increasing Market Efficiency - As markets grow and mature, they become more efficient. Globally it is observed that, with increasing market efficiency, the ability to generate alpha is diminishing. This market efficiency has led to a decline in active fund performance in developed nations across the world. As per the SPIVA year-end 2020 report, 75% of active funds underperformed their benchmarks over a 5 year period in Europe and the USA. Similarly in Canada, 99% of active funds underperformed their benchmark and in Japan 70% underperformed their benchmark over the same time period.·Their survivorship is also in question as typically only 62% of all domestic funds in the US survived over 10 years.

“Don’t look for the needle in the haystack. Simply buy the haystack.” 

- Jack Bogle, famous investor and major proponent of index funds

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