A. Passive ETFs

Why invest in Passive ETFs ?

Overview

Passive investing refers to buying securities or financial assets and holding them for the long term (at least 10 years or preferably longer) to earn income from the investments. Passive ETFs generally refer to the use of ‘index’ funds, which are funds constructed to track the performance of some stock index. The SPY, for example, simply buys all 500 stocks in the Standard & Poor’s 500 Index in exact proportion to each stock’s weight in the index based on its outstanding market capitalization.

Cost

Passive investing generally minimizes management activities. It seeks to replicate a benchmark, not surpass it. So passive investing does only what is necessary to mimic the holdings of a specific index. This strategy often minimizes the expenses that accompany active management.

Availability and access to information

The argument in favor of investing in passive index funds rests on the economic concept of ‘market efficiency’, which essentially states that stocks in aggregate are priced efficiently such that their market prices fairly reflect the ‘intrinsic value’ of the stock. If stock prices were perfectly efficient, there would be no sense in doing any kind of analysis to try to outperform the efficient market. This is probably more so in the developed western markets as compared to emerging markets.

Performance

$100 passively invested in S&P 500 Index in 1975…

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