Be Passive When It Comes to Large Cap Equity Funds

When it comes to the passive versus active debate, there are scenarios where the former might work best for certain asset classes versus the latter and vice versa. Where should investors lean when it comes to large cap equity exposure?

Passive funds might be the most optimal choice, but not necessarily the definite choice.

“I would be very careful with saying “definite” because very few things in investing are,” said Alex Bryan of Morningstar. “There are a good active managers really in all categories, but I think the odds of outperforming in large-cap stocks are not quite as good as they are in some of those other areas of the market that we talked about.”

“So large-cap stocks are a really good candidate for index funds because these tend to be areas of the market where the index is a representative of how active managers invest,” added Bryan. “Index funds charge a lot less than their active counterparts–that works to their advantage. These are also areas in the market that are highly competitive, where there are a lot of well-informed investors who are competing against one another, driving prices toward their fundamental values. So it’s very difficult for active managers to consistently outperform by identifying mispriced securities.”

“So I think all those things really work in, in favor of index funds in these highly liquid, highly competitive large-cap stock markets, both in the U.S. as well as in foreign developed markets as well,” Bryan said further.

Here are three passive funds to get large cap equity exposure around the world:

  1. SPDR S&P 500 ETF (NYSEArca: SPY): seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index, which is a diversified large cap U.S. index that holds companies across all eleven GICS sectors.
  2. Xtrackers CSI 300 China A-Shares ETF (NYSEArca: ASHR): seeks investment results that correspond generally to the performance of the CSI 300 Index. The underlying index is designed to reflect the price fluctuation and performance of the China A-Share market and is composed of the 300 largest and most liquid stocks in the China A-Share market. The underlying index includes small-cap, mid-cap, and large-cap stocks.
  3. iShares Core MSCI Europe ETF (NYSEArca: IEUR): seeks to track the investment results of the MSCI Europe IMI. The index is a free float-adjusted market capitalization-weighted index which consists of securities from the following 15 developed market countries or regions: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

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