Index investing covers a wide range of investing strategies some short term and some long term and increasingly Exchange Traded Funds are the investment vehicle of choice for institutional and retail investors.
Passive (or index) investing involves buying the whole market rather than trying to guess which stocks or other securities are going to outperform the market. For more details of the case in favour of passive index investing in Australia refer to this paper prepared by Vanguard (who offer passive funds)
Passive versus Active investing
There are arguments both for and against passive versus active investing, the line between the two investing strategies is not a clear cut one.
Traditional passive (or index) investing involves buying the whole market and tracking an index, an index represents the whole market for a particular group or basket of securities/financial assets. The ASX200 is an example of an index. The ASX200 represents the top 200 listed Australian companies by market capitalisation. This type of investing is often called passive investing compared to active investing.
While ETF’s follow an index some of the indexes they follow can be very exotic and offer great diversification benefits to potential investors and might be better characterised as following an active management strategy.
An index represents a group or basket of securities/financial assets, the ASX200 is an example of an index. The ASX200 represents the top 200 listed Australian companies by market capitalisation.
Investing in indexes via ETF’s has many advantages including low fees, low taxes and increased opportunities for diversification.