Passively managed portfolio that often tracks an index. Actively managed portfolios often come at a higher expense ratio or charges you a fee based on your assets under management (0.5 to 2% of the money you have invested)
Select a broker and look at the fee setups and ongoing expenses
Passively Managed
Goal: Match the performance of a specific market index (see Step 2.3 - Index)
Strategy: Invests in a diversified portfolio of securities that mirror the composition of a specific index.
Costs: Lower fees compared to active management as there's less trading and research involved.
Risk: Lower potential returns but also lower risk due to the buy-and-hold strategy and diversification.
Actively Managed
Goal: Outperform a specific benchmark (like the S&P 500) by carefully selecting individual securities.
Strategy: Fund managers constantly research, analyze, and trade securities to identify undervalued stocks or market trends.
Costs: Typically higher fees due to the intensive research and trading activities. Some will require a minimum of $100,000 or even $1,000,000 just to open an account or portfolio.
Risk: Higher potential returns but also higher risk due to the active trading and market timing involved.
Check their historical returns over the past 5-10 years to see their overall performance and not just peak years. For example, everyone did well in 2021, but the market crashed in 2022. How did they perform in a bad year?
This would be worthwhile if you:
Do not want to manage your money
Want professionals who are active in watching your investment
The company you select has shown consistent returns that beat the S&P 500. If they are not beating them, or are similar to the S&P 500, why not do it yourself? Why pay higher fees to have the same returns as a Passively Managed portfolio or something you can do every month?
Target Date Mutual Funds are Passively managed portfolios that often track an index.
Shares amounts are relatively inexpensive allowing you to buy a high number of shares
Portfolios are more growth oriented at inception/start
Portfolios starts to become more conservative (bonds, utility and financial companies, dividend companies) as it approaches your target date.
The transition is to help protect your money closer to retirement; though it does not offer protection against inflation.
Most people often keep a higher percentage of growth in their portfolio to counter annual inflation
Similar to Mutual Funds, it may track an index like the S&P 500.
Index funds track a specific Index used to track the market.
Standard & Poor's 500 - S&P 500, Nasdaq 100, Russell Index (1000, 2000, 3000)
You cannot purchase an index, but you can purchase ETF's set up by hedge funds that track and mimic the index.
Indices are a theoretical measurement of the market health and strength.
Major indices will often remove poor performing companies and replace them with emerging or companies that are performing. This allows indices to continually provide positive returns over the long run.
Indexes may offer
Broader exposure to the 11 sectors
Higher concentration in a specific sector/industry
Ability to invest in companies that you would not be able to invest in individually due to the cost
For Indexes like the S&P 500 or Nasdaq 100, it invests in the top performing stocks
Russell offers exposure to emerging companies that may be unknown to average individual
In general, investing in an index is great choice if believe that the US Economy will continue to grow.
For starters, you can still invest in an Index along with any other ETFs that fit your investing strategy.
Hedge funds follow all major indexes
For each index, they purchase shares of each stock listed in the index to create an ETF that is available to trade in the market.
The weight of the index is based on the market capitalization (Share Price x Outstanding Shares).
How Hedge funds make money
Expense Ratios of the ETF. This expense ratio is taken out monthly to cover their expenses and profitability.
Buying and selling of the ETF's and shares.
You pay $15.45 per share, but the actual price goes out to 6 to 8 decimals (e.g. $15.44928834).
While the fractions of cents do not seem like much, imagine that some stocks trade 100's of millions of shares a day and there are close to 10,000 stocks in the US Stock Exchange. 100,000,000 shares x 0.001 = $100,000 profit for the hedge fund.
ETF's can also represent sectors/industries of the market
Semiconductor market, Crypto, Health Care, Energy, etc...
While ETF's can offer exposure like an index, not all ETF's are created equal. Some have higher expense ratios and merely include all major companies in that sector vs being selective in what is included in the sector.
Selecting ETF's that represent the major indices (S&P 500, Nasdaq, Russell) are safer investments
Though past performance does not always mean future performance, it is a good measurement of it's consistency and management.