Exchange Traded Funds

One big difference between a traditional mutual fund and an ETF is that many mutual funds have a portfolio manager who tries to beat the index by selecting fewer stocks than those in the index. They are what the industry calls Active Funds as they are supposed to be actively managed by the portfolio manager who selects stocks which they think are better to own than others. ETFs, however, are traditionally what the industry often calls Passive Funds as they passively own the whole index. There is lots of debate about Active vs Passive – you can Google it!

Based on our research and readings we believe the Passive approach serves investors better in the long term as you are guaranteed to at least save the often hefty fees active managers charge. Additionally, by owning ETFs tracking major indices you inherently gain exposure to the largest, most liquid and tradeable companies in a particular region, country or sector. Companies which do well and become successful and large, which may not be in the index today, will one day and you’d then own those companies. Those which perform poorly and dwindle to become smaller underperforming stocks will leave the index and you’d no longer own them. i.e. there is an inherent positive selection bias, which over many years works in your favour.

When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.

– Warren Buffett, Berkshire Hathaway letter to Shareholders, 25 Feb 2017.