Modern investing faces the challenge that traditional forms of savings hardly yield any returns, which is why many people yearn for alternative ways to maintain their wealth. In this context, exchange-traded index funds are increasingly becoming the focus of public attention, as they provide seemingly easy and cost-effective access to global financial marketssuch a fund is basically a special fund that is designed to accurately track the development of a particular stock market index. Unlike traditional mutual funds, where a manager tries to outperform the market through skillful selection, this passive approach aims to accurately reflect market development.
The differences to classic investment funds
Numerous studies have shown that it is hardly possible for active managers to beat the benchmark in the long term. Since it is a special fund, the investors’ deposits are securely protected against a possible insolvency of the provider. The main difference from conventional funds lies in the passive management, which is directly reflected in theCosts, there are no surcharges, and ongoing management fees are significantly lower because the administrator does not have to carry out an elaborate individual analysis.
Historical development and risk diversification
The first products of this kind saw the light of day in the United States a few decades ago. After the change into the new century, they also found their way into Germany and have since enjoyed growing popularity among a wide range of investors. The biggest advantage lies in the broad distribution of capital, since with a one-time purchase act an entire marketthis allocation of risk to many different debtors helps to optimise fixed assets efficiently and to cope with individual total losses.
Behaviour in the event of major stock market downturns
Time and again, the claim is made that such passive products must inevitably fail in the event of a major stock market collapse, as they are vulnerable to losses. Active managers argue that they can better protect capital in times of crisis by acting quickly. However, if you look at the historical data over longer periods of time, this is put into perspectiveArgument. In the years following a slump, investors who simply track the market have often outpaced active managers. Ultimately, you have to focus on the long-term development anyway, where the lower costs of the passive approach bring a decisive advantage in the overall return.
Dealing with weak companies in the index
Critics often complain that buying an index fund inevitably also acquires companies that perform poorly or do not generate profits. These weak positions could detract from the overall result, which is why active managers reject this flat-rate form of investment. However, reality shows that even the best experts repeatedly make wrong decisions andalso invest in weak values. Most market participants permanently fail to reliably separate the future winners from the losers. The attempt to filter out only the good companies often ends with below-average results for private investors due to high trading costs and incorrect assessments.
Market efficiency and free-riding
According to the doctrine of efficient markets, all available information is already included in the prices, which is why fair prices prevail. Positive news drives up prices, while bad news leads to falling prices, so supply and demand are always in balance. Under these conditions, it is hardly possible to carry out aGaining an information advantage and beating the market permanently. Passive investors only use the fair prices, which are constantly re-determined by active experts, auditors and institutional investors. In a way, they act as free riders who benefit from the elaborate work of the other market participants without contributing to the pricing themselves.
The influence on price formation and weighting
A common misconception is that these funds artificially distort price movements by inevitably having to buy more and more shares as prices rise. In practice, however, only the share of the respective company within the fund increases, without necessarily having to acquire new securities. An adjustment of the stock usually only takes place ifwhen a company is newly included in or removed from the index. However, such reallocations are rare and usually only affect a very small part of the total market volume. As long as the passive share of the overall market remains manageable, these mechanical adjustments have no significant influence on price formation.
The thought experiment of a purely passive investment world
In view of the many advantages, some observers wonder what would happen if at some point all people only invested their money in such index funds. Without active auditors who analyze company balance sheets and determine fair prices, prices would deviate further and further from the actual economic values. In such a world, active investors would haveexcellent opportunities, as they could take advantage of the inefficient prices. The market would therefore regulate itself, because a situation in which no one is actively evaluating is not stable in the long term. In addition, it is illusory to believe that all of humanity would ever pursue identical investment strategies, since individual needs and beliefs are far toounterschiedlich sind.
Exercise of voting rights at general meetings
An often overlooked aspect is the fact that these funds hold large holdings of shares and thus have corresponding voting rights at the general meetings. For the individual private investor, this voting right is usually not usable, which is why the fund companies exercise these rights on behalf of the clients. Active managers use this power to improve corporate governanceand to influence it in the interests of shareholders. In the past, however, there was criticism that some passive providers simply waved through the applications of the boards without setting their own accents. In the meantime, however, many companies have promised to use their voting rights more consciously in order to actively represent the interests of investors at the meetings.
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