We come across these terms again and again: active funds, passive funds, ETFs. But the fund providers don’t always say exactly what they mean. There are often big differences in the fees. We take a look at where these come from and go along with the passive funds.
Active or passive is the term used in connection with investment funds. Funds are characterized by the fact that they spread the risk more widely: instead of investing in individual securities, the money is spread across many securities. Typically, we think of shares, but funds can also include other asset classes such as bonds. If an individual security rises or falls, this has less impact on the total fund assets because the security only accounts for a small proportion. The fluctuations are balanced out by the other securities. This reduces the risk.
Algorithm versus human when investing money
With active funds, a fund manager decides which units to buy or sell and when based on their experience. In return, the fund manager receives a salary and a bonus, which translates into fees that significantly reduce your return.Passive funds are compiled according to indices and traded automatically – no fund manager makes an active investment decision here. These so-called exchange-traded funds (ETFs) and index funds are made up of securities from the same asset class. For example, there are ETFs that are based on the SMI and therefore the Swiss stock market, or those based on a region or sector. ETFs precisely track the market performance of the underlying index, with little administrative effort and usually automatically, i.e. more cheaply. This is because an algorithm makes decisions about buying and selling instead of people. For you, it’s a bit like riding a running board.
ETFs are becoming increasingly popular with investors, as the comparatively low costs combined with diversified risks are attractive and lead to higher returns overall. Numerous studies have also shown that the vast majority of fund managers do not beat the market anyway and therefore cannot keep their promise to outperform an index against which they are mostly compared. Long-term investors can therefore invest relatively stress-free via ETFs.
ETFs on equities are currently the most popular ETF category. They carry a higher risk than other ETFs, but given some time – a long-term investment horizon is 7-10 years – investors have so far benefited from the higher returns. In this article you can see how ETFs have performed to date.
Active or passive pension provision
Saving for old age is also generally designed for the long term. However, you can’t choose how your pension fund invests the money. With pillar 3a, on the other hand, you do have a choice. Historically, the majority of pension fund assets have been invested in actively managed funds, but ETFs have also been making their way into pension provision for some time now. Passive 3a pension funds combine various ETF products to cover different regions and asset classes.
In pillar 3a, the lower fees benefit the compound interest effect particularly strongly due to the long investment horizon. While active 3a pension funds charge the fund assets annual fees (so-called total expense ratio) of up to 1.6 %, these are between 0.38 % and 0.94 % depending on the passive 3a pension fund. In the best case scenario, you can even get away with 75 % lower costs! You can find out more about pillar 3a ETFs here.
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Last update: 08.12.2024 13:48
