Investors choose passively managed funds when they want to buy assets and not advice.
Assets in a passively managed fund are not continually researched, analyzed, and reconfigured by fund managers (experts, presumably).
That’s the bad news.
But it’s the good news as well. This lack of active management means that shareholders in a passively managed fund don’t foot the bill for fund management services.
The Difference Between Passive and Active Management
A typical fund manager claims a 1% share of all assets under his management. Even if the fund performs horribly, he still gets his 1% (that is, until he gets fired).
A passively managed fund’s asset pool is built to reflect the components of a particular stock index, like the S&P 500, or a particular section of the market, like energy stocks.
Changes to the fund’s composition are heavily automated and incur very minimal charges for shareholders, much lower than 1%.
Now, if actively managed funds outperformed their passively managed counterparts by at least 1%, they’d be worth the added expense.
The problem is, they don’t.
According to the Financial Times, nearly all US, global, and emerging market actively managed funds have failed to outperform passively managed funds.
As a result, investors are jumping ship and putting their money in index-based or sector-based passively managed funds.
The graph below shows the flow of investor dollars into both fund types since 2009. Year after year, more money has been invested into passively managed funds, while actively managed funds have shed hundreds of millions of dollars. This trend is especially pronounced over the last two years.
As interest in passively managed funds continues to grow, investors are on the hunt for the most promising among them.
Here are ten passively managed funds to watch in 2017:
10. iShares Core S&P 500 ETF (IVV)
The recent implementation of new fiduciary rules convinced BlackRock Inc. to lower fees on several of its ETFs.
As a result, BlackRock’s once-pricey iShares Core S&P 500 ETF (IVV) is now among the cheapest S&P 500 index investments available on the 2017 market.
If you’re looking to invest broadly in large cap equities, this iShares ETF is an attractive vehicle indeed.
9. Vanguard Short-Term Corporate Bond ETF (VCSH)
Vanguard’s Short-Term Corporate Bond ETF (VCSH) is a conservative investment, appropriate for investors closing in on retirement and looking for a steady source of income.
The bonds selected in this portfolio are A-rated. The high rating, combined with the focus on short-term maturity, minimizes risk and also sets up a buffer against rising interest rates.
Ideally, however, you’d buy into this Vanguard fund after the Fed’s likely March 2017 interest rate hike.
8. Fidelity Nasdaq Composite Index Fund (FNCMX)
This mutual fund from Fidelity may not be the cheapest out there, but its .3% ratio still beats the standard 1% fee you’re likely to pay with most actively managed mutual funds.
The Fidelity Nasdaq Composite Index Fund (FNCMX) has performed nearly on par with the Nasdaq stock index for the last ten years. Google, Microsoft, Amazon, Facebook, and other Nasdaq blue chippers make up the bulk of this fund’s portfolio.
If you’re looking for a low-fee, high-tech investment, this one’s for you.
7. Vanguard Health Care ETF (VHT)
With an expense ratio of .1%, the Vanguard Health Care ETF (VHT) is hard to beat.
Considering that similar industry composite funds can have expense ratios as high 1.33%, you’re going to save a lot of money by finding a fund like this one that offers high performance without the added baggage.
A $10,000 investment over ten years at .1% vs. 1.33% is a net savings of $2,731. That’s nothing to sneeze at.
VHT just reached a 52-week high in early March of 2017.
Its balanced allocation of health care securities includes health care distributors, equipment manufacturers, biotech companies, and pharmaceuticals.
Full disclosure: This is the only fund on our list in which the author owns shares.
6. iShares Russell 2000 ETF (IWM)
The ever-popular iShares Russell 2000 (IWM) is your gateway to smaller cap equity stocks.
After a big February rally culminating in a 52-week high, IWM has cooled off in early March, perhaps creating a good buying opportunity.
5. SPDR Bloomberg Barclays High-Yield Bond ETF (JNK)
This notorious ETF is the product of State Street Global Advisors.
This fund is comprised of high-yield “junk bonds.”
The expense ratio is .4%, which is not the greatest, and the fund’s returns are questionable. But, when it comes to the 2017 landscape, JNK investors may be in for a pleasant surprise.
A new Invesco report (PDF) came out in February of 2017 that tracked the performance of high-yield bonds during periods of rising interest rates (the kind of environment we’re anticipating for 2017).
The report found that rising interest rates tend to accompany an expanding economy, where more companies are diligent about paying down their debts. High-yield junk bonds, they found, perform well in this environment.
4. Vanguard Energy Fund (VGENX)
While the Vanguard Energy Fund (VGENX) is billed as an “actively managed fund” by Vanguard, its low expense ratio of .37% suggests that Vanguard may just be trying to showcase VGENX as a mutual fund offering more bang for less buck.
VGENX is heavily concentrated in oil and gas. The dynamics of the energy sector, from the Middle East to Russia, as well as domestically, will greatly affect the performance of this fund in 2017.
3. SPDR S&P 500 ETF trust (SPY)
You can’t have a discussion about index funds without mentioning the world’s first-ever ETF, the SPDR S&P 500 (SPY).
SPY continues to set the standard for passively managed funds, boasting an incredibly low expense ratio of .09%.
2. The Schwab US Broad Market ETF (SCHB)
With a track record of steady growth, the Schwab US Broad Market ETF (SCHB), includes both large- and small-cap stocks, attempting to reflect the performance of the Dow Jones Broad Stock Market index.
This Schwab ETF comes at a very low cost (.03% expense ratio), and is a great way to make a diversified, low-drama investment.
1. VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
This VanEck ETF is a unique investment vehicle focused on preferred stocks from a multitude of industries, excluding financials.
Preferred stock holders get a more stable and reliable dividend payment compared to common stock holders. By excluding the financial sector and focusing on preferred stocks, the PFXF ETF is designed to minimize volatility and provide a dependable option for investors looking to stabilize their dividend income with a low expense (.41%) ETF.
The Bottom Line
The bottom line is that understanding the potential that passive funds have when it comes to delivering favorable results can be an important component of successful investment practices.
What investors lose in analysis and professional management, they often can make up in lower fees and more money in their pockets.
This article is a part of our ongoing series that explores the world of financial investment. The information contained herein should not be construed as ‘financial advice’ and is presented as the opinion of the author. ClydeBank Media does not offer financial investment services and has no ties to any of the funds presented in this list. Please see our full financial information disclaimer.
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