Lastly, indexing generally offers lower costs, greater transparency and portfolio diversification. Index-linked products generally have lower management and administration fees and no commissions. There is also less turnover in ETFs than in most actively managed funds, resulting in lower trading costs and fewer taxable events, such as capital gains distributions. All of these reasons contribute to the cost of investing in an ETF being less expensive than the cost of investing in actively managed funds.
Compared to active funds, ETFs are typically more transparent as most ETF providers update ETF performance and constituent lists every trading day on their websites, whereas most actively managed funds only publish a selection of their holdings on a monthly basis. Indexing also provides more portfolio diversification as each index can track hundreds–even thousands–of securities, which reduces a portfolio’s dependence on single investments.
This article was written by Priscilla Luk, director, index research & design, S&P Dow Jones Indices.
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