The advantages of index trackers include generally lower costs and no manager risk, while the main advantage of active investing is the potential ability to achieve outperformance over the benchmark.
The passive fund industry has grown strongly over the last decade or so as investors have increasingly sought out lower-cost solutions and, in the case of the UK, due to the Retail Distribution Review (RDR).
This growth has been particularly strong on the exchange traded side and shows no signs of slowing.
Index trackers don’t always have to replace their active equivalents though – indeed, it is often sensible for portfolios to contain both active and passive investments.
Within index trackers, funds can have either exchange traded or more traditional open ended structures and invest via full, part or synthetic replication.
Among the different passive peer groups there have often been variations in charges, ability to track and other fund attributes, therefore initial due diligence and ongoing review are important.
Defaqto’s Diamond Ratings can act as a framework for research into index trackers, comparing and rating them across a range of criteria and allowing advisers – and their clients – to see where they sit in the market in terms of quality.
Patrick Norwood is funds insight analyst at Defaqto