Watch out Wall Street, passive investing is the coolest kid in school
3 minute read
We’re witnessing one of the most dramatic transformations in the history of financial markets: passively managed funds have overtaken actively managed funds in popularity. According to Morningstar, passive funds totalled $4.27 trillion, surpassing their actively managed counterparts at $4.25 trillion.
Passive attack
In the past, individuals and large institutions mostly invested in actively managed mutual funds where fund managers hand-picked stocks with the aim to beat the market. But over the past 15 years, they’ve been under pressure because of disappointing performance, high fees and booming share markets. Not surprisingly, the decline of the actively managed industry gained speed after the global financial crisis in 2008, where many of these funds found themselves pulled down with the undertow of the financial crisis. Investors began to pile into low-cost index funds once it became clear that that actively managed funds didn’t protect them from the market crash, despite paying higher fees for their service. The rate and magnitude of this change are impressive, to say the least: from 2007 to 2016, actively managed funds saw outflows of roughly $1.2 trillion, while passive funds saw inflows of over $1.4 trillion. That’s some easy math.
Trending hard
The popularity of passive funds has democratised investing by lowering investing costs making investing a possibility for even the smallest investors. Index funds include products like exchange-traded funds (ETFs), track market indexes, so portfolio management costs are reduced and spread over millions of investors. According to Warren Buffet, investment fees matter. And obviously, the lower the fees, the better off the investor. When you’re making 7-8% in returns, fees can make an enormous difference when you’re retired.
The foundation of sound investing is all about the ability to minimise risk by spreading investments across sectors, industries and companies. ETFs that track market indexes like the S&P 500, offer everyday investors – like you – the benefit of diverse holdings in the largest 500 companies listed on stock exchanges in the US. And of course, you can access most of them through Hatch.
It’s Game of Thrones on Wall Street
Passively managed fund managers have cemented their position as the new power brokers of Wall Street. BlackRock, Vanguard and State Street, now wield an incredible amount of power by holding trillions of dollars of assets in major companies. Think about it: these are some of the most significant shareholders of our time, and together they’ve become the largest shareholder in 40% of all publicly listed firms in the US. Should we be nervous? Well, it’s a pivotal quandary. How, when, and why should fund titans exercise their considerable (and ever growing) power over companies around the world? Better yet, who will hold them to doing the right thing?
What’s hot on Hatch
With over 500 ETFs on hand, you’re probably curious about what Hatch investors are investing in. We’ll let you in on the secret. Let’s start with the five most popular ETFs:
1. Vanguard S&P 500 (VOO) tracks the S&P 500 index, which includes about 500 of the largest US stocks (Microsoft, Apple, Amazon, Alphabet, etc) and has a low expense ratio of just 0.03 percent.
2. Vanguard US Total Stock Market (VTI) tracks the Dow Jones US Total Stock Market Index, which includes the entire US stock market of over 3,500 stocks. The expense ratio for VTI is also 0.03 percent.
3. Powershares Invesco (QQQ) tracks the NASDAQ 100, which primarily consists of technology stocks (Microsoft, Apple, Cisco, Intel, etc) with some healthcare, biotechnology, and consumer discretionary stocks (Starbucks, eBay, Marriott, etc) included.
4. SPDR Gold Shares (GLD) tracks the performance of gold bullion and offers investors an innovative and secure way to access the gold market and add some bling to their portfolios.
5. Vanguard Information Technology (VGT) seeks to track the performance of an information technology index and includes stocks like Microsoft, Apple, Mastercard, Visa, and Intel.
Hatch investors know best
Data is all good and well, but we also have a posse of experienced investors in our Hatch Investors Club. Here are the ETFs they’re talking about:
Vanguard RIET (VNQ)’s top-ten holdings represent the "who’s who" of the largest real estate investment trust operators, including such players as American Tower, Crown Castle, Prologis, Simon Property and Equinix.
BlackRock iShares Silver Trust (SLV) is a trust which holds silver bullion and is designed to provide investors with a simple way to gain exposure to the price of silver in an investment portfolio.
USA Minimum Volatility MSCI (USMV) tracks an index composed of US stocks that have lower volatility characteristics relative to the broader market and includes Coca-Cola, Waste Management, McDonald's, Pepsi, and Visa to name a few.
Proshares VIX Short-term futures (VIXY): Designed for knowledgeable investors who seek to profit from increases in the expected volatility of the S&P 500, as measured by the prices of VIX futures contracts. The VIXY is intended for short-term use and can reduce US equity portfolio risk since changes in the VIX futures index have historically been negatively correlated to S&P 500 returns.
Vanguard Utilities (VPU) includes stocks of companies that distribute electricity, water, or gas, or that operate as independent power producers like NextEra, Duke, Dominion, and Southern Co.
What is Hatch?
With Hatch, you can buy and sell shares in over 2,900 companies & 500 exchange-traded funds, all listed on the US share markets. Invest dollar amounts to buy as much or as little of a company or ETF as you like, even if it’s a fraction of a share. See how it works
Start investing nowYes, there’s an ETF for that!
The ETF industry truly does have something for everyone. Investors looking to invest in their values and interests close to their hearts are literally spoiled for choice. Keen on genes? You’re covered with ARK’s Genomics ETF. Hardcore health nut? You can invest in SPDR’s healthcare ETF. Who knew?! Hatch has some unique options on offer:
Vanguard Small-Cap Growth (VBK) provides a convenient way to match the performance of a diversified group of small growth companies.
ARK Fintech Innovation (ARKF) gives an investor exposure to fintech innovations including mobile payments, digital wallets, peer-to-peer lending, blockchain technology, and risk transformation.
SPDR Gender Diversity (SHE) invests in US large-cap companies that rank among the highest in their sector in terms of gender diversity within senior leadership positions.
BlackRock Global Clean Energy iShares (ICLN) tracks the S&P Global Clean Energy Index which is composed of global stocks in the clean energy sector.
ETFMG Alternative Harvest Cannabis (MJ) tracks the Prime Alternative Harvest Index, designed to measure the performance of companies within the cannabis ecosystem benefitting from global medicinal and recreational cannabis legalisation initiatives.
Passive is massive
Passive funds like ETFs are one of the most exciting innovations the finance industry has seen in modern history. They’ve directly benefited retail investors’ returns in the form of cheaper fees, and their popularity shows that they’ll continue to be cash cows for some time. Active managers could still rebound if the share markets face a few periods of sustained declines. Either way, there's no doubt that the next few years is going to make for an exciting showdown on Wall Street.
Want a piece of the action? Join Hatch today.