Why you should be a passive and not an active investor Part III: the solution, passive, low cost investment products that simply track the market

A passive investment is any investment product where the rules for investing are set when the product is created, and they are rarely, if ever, changed. It is a constant and simple product. Most of these products do not have a manager, and are very simple products, with very easy to understand rules: this includes index trackers and ETFs in particular. A good example is the Lyxor ETF (Lyxor is a large French asset management company offering many such products, like BlackRock, Amundi, Vanguard…), which tracks (“follows” or “replicates”) the MSCI World (the MSCI World is a combination of thousands of large public companies from around the world: American companies, Japanese companies, German companies…): Lyxor MSCI World UCITS ETF. Its official file on the Lyxor website tells you very clearly and simply what this product does:

The Lyxor MSCI World UCITS ETF — Dist is an ETF compliant with the UCITS Directive which seeks to replicate the performance of the MSCI World benchmark index. Net Total Return USD Index.

The values ​​of the MSCI World Net Total Return USD Index are selected to represent 85% of the global market capitalization, while reflecting the economic diversity of this market. The methodology of the index is available at www.msci.com

Lyxor ETFs are listed investment funds that provide loyal and inexpensive exposure to a benchmark index.

(https://www.lyxoretf.fr/fr/retail/produits/etf-actions/lyxor-msci-world-ucits-etf-dist/fr0010315770/eur)

Why do I recommend ETFs and indexes?

1. They are very easy to understand. Their description tells you what they do, and exactly what they do. When you buy a CAC 40 index (an Index of the French stock exchange, or as its name better indicates of the top 40 public companies in France), you are buying the CAC 40, the collection of the 40 largest French public companies, quite simply.

2. They save you from trying to select fund managers who are likely to outperform public markets. As we have already seen, selecting fund managers capable of outperforming public markets is extremely difficult. So difficult, that I am against it. Indexes and ETFs do not have a manager, and do not try to outperform. These products simply replicate the performance of public markets. The annual performance of the S&P 500, or of the CAC 40 for example. You just want your money to be exposed to the market returns — you are not trying to select managers who promise you they can beat the market.

3. Last but not least, passive products cost a fraction of what active products cost. As you know, one thing that you have 100% control over in finance is the cost of your investments. The easiest way to improve your potential returns is to control the cost of the products you invest in. For example, while active investment funds will easily charge 1–2% management fees per year or more, index funds and ETFs should cost no more than 0.20–0.70% per year. Fidelity has in fact just introduced an index fund with 0.20% management fees per year in the United States (American investors are very lucky).

How to recognize passive products?

· Passive products are typically labeled as “ETF” of “Tracker.”

· They usually don’t have a portfolio manager or fund manager

· They follow simple rules, explained in their description i.e. “The SPDR S&P 500 ETF aims to replicate the performance of the S&P 500 [the 500 largest public companies in the US].”

· They have low fees, typically 0.20% to 0.80% all in

· The largest houses that create and distribute these products are Vanguard (which invented these products), Fidelity, BlackRock (iShares collection of products), Amundi, L&G, and many major banks in your own country, although these typically also offer a lot of active funds with fund managers and much higher fees (and many times lower performance).