Stay diversified with our Passive Index Collection

By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. 

– Warren Buffett, in Berkshire Hathaway shareholder letter in 1993

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These are the wise words from Warren Buffett given some 31 years ago about general investors and broad diversification. In his letter to shareholders, Buffett advocated for the index investing strategy, but what is it? 

He believes, a novice investor can outperform in that “when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases.” 

Index investing, which involves tracking market indices rather than trying to beat them, has gained traction due to its simplicity and cost-effectiveness. It is often referred to as a passively-managed investment strategy.

Why choose unit trusts for passive index investing?

When it comes to index investing, the investment vehicle that comes to mind is typically exchange-traded funds. In fact, unit trusts or mutual funds provide unique benefits for long-term investors.

The largest and most liquid ETFs are often priced in hard currencies, such as US dollars, which may not be the natural base currency for many investors. For example, a Singapore investor would need to first convert his/her money into the foreign currency (i.e. SGD to USD), thus  incurring a currency conversion fee, just to invest. You’ll have to do the same upon redemption. The two-way currency conversion fees behind foreign-listed ETFs add another layer of fees and hassle. Unlike ETFs, unit trusts have no bid-ask spread concerns, potentially resulting in lower overall costs. They may also have lower tracking errors, closely mirroring the index's performance. 

The rationale behind the curated passive index collection 

From global equities and bonds to US and emerging markets, there are passive index-tracking products that can help investors express such exposures. However, not all index funds are created equal, as price, process, and index selection all come into play.

Based on these factors and other selection criteria, the Endowus Investment Office has curated the Passive Index Collection. This collection features five funds managed by Amundi and iShares, which track the global, US and EM indexes. 

With a track record of maintaining low tracking error at a low cost, these funds offer a simple and cost-effective way to invest in the market. By tracking major indices, these funds provide instant diversification and exposure to a wide range of securities. With lower fees and a passive investing approach, index funds usually form the bedrock of many investment portfolios.

What is tracking error?

Tracking error happens because indexes are theoretical. While replicating the index performances, managers of index funds and ETFs face challenges and frictions, like transaction costs and timing differences, which can cause performance differences from the index. Asset managers work to minimise these frictions.

How clients can adopt the passive investing strategy in their portfolios

Depending on your investment objectives and risk tolerance, If you are looking for broad market exposure, diversification, and cost-effective investing, then the collection is likely for you.

The passive index collection consists of funds that track various broad market indices, such as the S&P 500, MSCI World, or Bloomberg Global Aggregate Index. With these, clients can enjoy instant diversification across multiple companies, sectors, and geographies. This helps to reduce the risk associated with holding individual stocks.

Passive index collection: List of funds

Capturing the growth of the broader markets

History proves that the world’s largest companies are unlikely to remain the largest. Big, well-known companies can be disrupted and replaced in their industry.

Rather than buying and holding individual companies, buy-and-hold indices or broad-based strategies can capture the overall growth of a market or several markets.

Why invest passive index funds with Endowus?

Index funds tend to be rather straightforward, easy-to-own, and cost-effective investment products. Regardless, cost still matters a lot when comparing different investment vehicles and remains the best predictor of returns. 

Endowus offers unit trusts at zero subscription and switching costs, the access to lower-cost institutional share class funds, which are not normally available to retail investors at other distributors. 

To date, Endowus has returned over $10 million in Cashback on trailer fees to our clients. That’s how you can lower your investing expenses over time and keep more returns on your investment. 

Check out our other curated fund offerings on Endowus Fund Smart.

Frequently asked questions

What is an index fund and how does it work?

Index funds are investment vehicles that track the performance of a specific market index, such as the S&P 500 or the MSCI World Index. The objective is to match the performance of the indices, rather than to outguess and beat the market, by replicating broad market exposure.

Is index fund good for beginners?

Passive investing offers a stress-free yet scalable way to diversify your portfolio. By purchasing units in index funds, you can effectively own hundreds or even thousands of companies. For instance, the MSCI World Index comprises 1,429 constituents across 23 developed markets. This approach aligns with Buffett's wisdom, allowing you to space out purchases and benefit from long-term market growth without the need for extensive stock-picking expertise.

Are all index funds ETFs?

This is a big misconception that all ETFs are passively tracking the markets, while all mutual funds are actively managed. The truth is, that numerous ETFs are not indexed or traded actively, and many also track different sub-sectors of a single country’s market. At the same time, there are also unit trusts that are passive-indexed funds.

What should I note if I invest in passive indexes?

The weighting method of the index being tracked, the exposure of the underlying index, and tracking error and potential active risk in your “passive” index investment are the three things to know before adopting an index investing strategy.