04 Sep 2017
Passive investing is a term to describe investing in funds that simply track an index. An index is basically a collection of stocks chosen based on certain criteria, typically by its size, as used as a way to measure how the general market is doing.
Are Active Fund Managers Doing Their Job?
In the past, indices such as the Straits Times Index, Hang Seng Index or the Kuala Lumpur Composite Index are just used to measure the performance of the general markets. Investors are rarely able to invest directly in the indices. Traditionally, fund managers are the ones who decide which stock and the timing to invest and sell an investment. These traditional funds are called active funds. Yet data is showing that 97% to 99% of fund managers underperformed the S&P Indices over the past 10 years.
This means that if you have just invested in a simple passive index fund that has no fund manager over the past decade, you most likely have earned more money than those high-paid fund managers.
These data show why should we pay extra billions in fees to stock market fund managers who consistently underperform? Even if you have no interest in research and investing in the stock market yourself, investing in a passive index fund just seem more logical and cost effective.
However, just choosing between passive index funds can be a challenge, given the largely available choices out there.
In order to make a smart decision on which index fund to invest in, we believe that you should still have a basic knowledge of what investing is about.
This basic knowledge includes:
Next, we have to know what are some of the more common passive index funds around. Here is the summary of a group of passive index funds that we have selected.
Most, passive funds are listed as Exchange-traded Funds (ETF) on the various exchanges. ETF are funds that are tradable on the exchange. It means we can buy this funds, like how we buy a stock, directly through our brokerage account.
Think of it as mutual funds that we can buy like stocks.
Vanguard 500 ETF (NYSEARCA: VOO)
Vanguard is the largest passive fund manager in the world. One of its flagship funds is Vanguard 500 ETF. It is an ETF that tracks the performance of the S&P 500 index. This means it invests in some of the largest companies in the world like Apple Inc, General Electric, Exxon Mobil and others.
The fund is also one of the cheapest in the world, with an expense ratio of just 0.05%. This means that we are only paying 5 cents a year for every $100 you invested in the fund. If you compare that to the typical 1% to 2% expense ratio for a mutual fund and a 5% sales charge when you buy them, you might see why passive funds are so attractive and why mutual funds tend to underperform.
The Hong Kong Market
Hong Kong also has some large passive funds listed as ETFs.
Hang Seng H-Share Index ETF (HKG:2828)
For example, the Hang Seng H-Share Index ETF is a HK$40 billion index fund that tracks the H-Share index in Hong Kong. H-Shares are some of the largest China-based companies listed on the Hong Kong Stock Exchange. This includes companies like Ping An Insurance, Industrial and Commercial Bank of China and PetroChina.
For investors who are optimistic about the future of large corporation in China, it is a simple way to gain exposure to these companies. However, expense ratio in Asia still tends to be much higher than in the US Market. The Hang Seng H-Share Index ETF charges about 0.6% in total a year to its fund investors. You can download the factsheet to Hang Seng H-Share Index ETF here.
Hang Seng Index ETF (HKG:2833)
Another common index fund in Hong Kong is the Hang Seng Index ETF. It is an index fund that tracks the performance of the Hang Seng Index. Unlike the H-Share Index, Hang Seng Index includes some of the largest companies listed in Hong Kong, including China-based, Hong Kong-based or international-based companies.
Some of the companies it invested in are HSBC Holdings, Tencent Holdings, CK Hutchison Holdings and even the Hong Kong Exchanges & Clearing Limited. Since its establishment in 2004, the fund returned more than 160% in total to its investors.
You can download the factsheet to Hang Seng Index ETF here.
The Singapore Market
Singapore has a much smaller passive fund industry. However, to gain access to the Singapore market, the SPDR STI ETF might be a good option.
SPDR STI ETF (SGX: ES3)
The SPDR STI ETF is a passive index fund that tracks the performance of the Straits Times Index (STI). The STI includes about 30 of the largest companies listed in Singapore. These are companies like Singapore Telecommunication, DBS Group Holdings, CapitaLand Limited and Keppel Corporation Limited.
Since its inception in 2002, the fund returned about 7.55% a year to its investors. And its expense ratio is quite low at just 0.3%. You can download the factsheet to SPDR STI ETF here.
The Malaysia Market
Although Malaysia does have a number of passive index ETFs listed on Bursa Malaysia, most of them are very thinly traded. This means it is extremely hard to invest in them due to the lack of interests. Hopefully, that would change in the future.
Passive Or Not To Be
The index fund market is clearly still massively underdeveloped in Asia. Looking at the growth this industry in the USA, it seems that Asia would continue to see growth in the passive funds market.
Although passive investing is not always perfect, some argued that it might lead to blind investing, creating a larger crisis in the future.
However, based on the poor performance of fund managers over the last decade, passive investing is gaining popularity as an alternative to paying a huge fee to fund managers who underperform 97% of the time.