In this note we provide an overview of the group of investment vehicle types termed “passive”, “index”, or “Exchange Traded Funds (ETFs)”. These are often lumped together in media reporting,and while they have some features in common, there are several important differences that it is important for investors to understand.

This paper does not discuss the arguments for and against active versus passive funds management, but explains the key consequences of adopting a passive, indexed approach, whether that is implemented via a managed fund, an ETF or a derivatives-based structure. Once an investor has made the decision to allocate funds to passive investment vehicles, with the intention of simply tracking the performance of an underlying market index, there is a second decision needed as to what form of passive vehicle is desired. This decision depends on goals, risk tolerance and cost efficiency.

Read on >