The growth of ETFs and index mutual funds has transformed investing, setting a new market standard. Watch this video of Martin Small, head of U.S. iShares, “bridging” the connection between electric guitars and index investing as revolutionary vehicles of change.
Round out your knowledge of indexing, ETFs and index mutual funds.
Institutional investors were the first adopters of index funds, more than four decades ago. Individuals quickly followed suit, thanks to the funds’ low cost, diversification and simplicity.
For example, indexes that track U.S. dividend-paying companies can have different rules on stock selection, leading to vastly different results.
Technology has made it possible to index strategies that were once only the province of active managers, such as smart beta ETFs that isolate factors like value, growth and low volatility.
While the annual expense ratio matters, you should make choices based on what’s important to you, be it tax efficiency, tracking error or types of companies in the index.
There’s a lot of work that gets done behind the scenes by skilled portfolio managers to help their funds deliver what they say “on the label.”
Index funds have plenty of room to grow. They represent just 10% of global stocks and bonds and about a third of managed assets overall.
Source: BlackRock estimates based on McKinsey, Markit, Bloomberg, Simfund and Broadridge data as of 12/31/16.
The two most common types of index funds are exchange traded funds (ETFs) and index mutual funds. While they’re similar in many ways, there are a few key differences to consider.
ETFs | Index mutual funds | |
---|---|---|
Portfolio construction | Professionally managed pool of securities that seeks to track a rules-based index. | Professionally managed pool of securities that seeks to track a rules-based index. |
Buying and selling | On an exchange, like a stock | Directly with the fund provider |
Share pricing | Market price set throughout the day, while exchange is open | Net asset value (NAV) set once a day, after market close |
For more information on the differences between ETFs and mutual funds, click here.