Morningstar's Guide to Passive Investing

SPECIAL REPORT: Price is the single most powerful predictor of future returns - and passive funds offer investors exposure to global assets on the cheap

Emma Wall 3 October, 2016 | 9:23AM
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When Jack Bogle, founder of Vanguard Asset Management launched the first passive fund in 1975 he was called “un-American”. The financial industry was so against his plan to revolutionise the way that we invest, a campaign was mounted insinuating Bogle was unpatriotic and a fool.

Fast forward three decades and new money invested in passive funds is growing at much faster pace than actively managed funds. In the US last month, investors pulled $18 billion out of active funds, but invested $49 billion into passive funds. The story is similar this side of the pond, the fastest growing part of the market is passively managed funds – and in particular those which are “smart”, or “strategic” and offer investors access to a certain slice of the market.

With new money comes new fund launches, and more choice for investors – who now have to determine not only where they wish to invest; China stocks, commercial property, UK government bonds, but how they want to invest too. In the UK investors have access to more than 3,500 open-end funds, 300 investment trusts and more than 2,000 exchange traded funds. Offering access to the most remote of stock markets, commodities and bonds from as little as £50 a month.

Not all of these strategies are worth investing in – only a fraction are deemed worthy of a Gold, Silver or Bronze rating by Morningstar fund analysts, based on their past performance, cost to investors, and investing process.

Of the five measures Morningstar fund analysts use to determine whether a fund is best-in-class, price is the single most powerful predictor of future returns – and passive funds offer investors exposure to global assets on the cheap.

But what exactly is a passive fund? And are they better than actively-manged funds in all circumstances? When should you opt for passive, and what role should an ETF play in your portfolio? All this week we are running a Guide to Passive Investing to help you, the investor, make smart choices to meet your long-term investment goals.

Monday: What is Passive Investing?

What is an exchange traded fund and what is meant by a tracker?

What is the Difference Between an ETF and a Tracker?

What is the Difference Between Physical and Synthetically Backed ETFs?

Passive Investing: What is Smart Beta?

What is a Fund?

Tuesday: Why Cost Matters

The power of price when it comes to predicting future returns

How Fund Fees are the Best Predictor of Future Returns

The Benefits of Passive Funds in Your Investment Portfolio

Bogle: Go Passive in a Low Return World

Cost is Key When Comparing Gold Funds

Do Active Funds Have a Future?

Wednesday: Top Passive Funds for Your Portfolio

We highlight the best in class and explain how passive funds are rated

ETFs: A Better Way to Invest in Commercial Property?

3 Ways to Profit from the Emerging Market Rally

Vanguard's Bogle: Smart Beta Funds Do Not Work

Multi-asset Fund Manager Who Favours ETFs

Thursday: Which Active Managers Earn Their Fee?

While many active managers fail to beat the market, these reward investors

3 Best Performing UK Equity Funds

Gold Investors Have Doubled Their Money in 2016

3 Top Rated Funds with the Lowest Fees

3 Top Rated Trusts on a Discount

Friday: Blending Active and Passive in Your Portfolio

Pensions, portfolio construction and market challenges

Bogle: Don't Take on Too Much Risk in Retirement

How to Use ETFs in Your Investment Portfolio

When Should You Use Active Funds?


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar

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