What is Passive Investing? What are Index Mutual Funds and ETFs? Who was Jack Bogle? What is a passive income strategy and what is maturity matching? Read on and find out.
In a Passive Investing Strategy, the investor is aiming to replicate the performance of the general (or a specific) market. Passive strategies are executed by investing in instruments or funds that replicate specific indexes. As the investment mandate of these funds is to track an assigned index, these do not require in-house research teams. This lowers their operating costs, which they need to keep as low as possible in order to replicate the performance of the index.
Jack Bogle was the creator of the first index fund. He founded and grew the Vanguard Group to become a leading asset management company as its chief executive. In his 2016 Annual Letter to Berkshire Hathaway Shareholders, Warren Buffett paid tribute to Jack Bogle:
“If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.
In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”
Bogle passed away in January 2019 at an age of 89. By that time the index mutual fund business in the U.S. had grown to become a $3 trillion industry.
Index Mutual Funds and ETFs
As explained above, in an Index Mutual Fund, there is no portfolio manager, but rather the fund tracks the composition of an index. Index Funds designed to track the general U.S. market normally use the S&P500 Index or the Russell1000 and Russell2000 indices as a benchmark.
Exchange Traded Funds that track indexes operate by the same investment policy as index mutual funds. However, a mutual fund will settle shares at the end of each day, while ETFs trade on exchanges throughout the day. As such, mutual funds and ETFs have different tax treatment.
Passive Income Investing Strategies aim to generate steady cash flow through dividend or interest payments.
Largest Passive Asset Managers
Asset Management Companies that are focused on Passive Investment Strategies have been able to scale their operations immensely with the growth of passive investing. It is estimated that about 20% of assets under management in the U.S. are in passive strategies.
The Vanguard Group
The Vanguard Group, as mentioned above, was a pioneer in Index Mutual Funds. Based in Malvern, Pennsylvania, the company has over $5.1 trillion in assets under management. It is the largest provider of mutual funds and the second-largest provider of exchange-traded funds in the world.
Fidelity Investments Inc. is a multinational financial services corporation based in Boston, Massachusetts. Fidelity had $2.46 trillion in assets under management as of March 2018.
BlackRock, Inc. is an American global investment management corporation based in New York City. The company was founded in 1988 as a fixed income institutional asset manager. Under the leadership of Larry Fink, BlackRock has grown to become the world’s largest asset manager with $5.98 trillion in assets under management as of December 2018.
BlackRock is the largest provider of ETFs as the manager of the iShares family of exchange-traded funds. Each iShares fund tracks a bond or stock market index. The first iShares ETFs were known as World Equity Benchmark Shares but have since been rebranded.
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