Index trading is an investment option that offers traders an opportunity to earn huge profits when done right. However, there are various misconceptions about it that can prevent traders from earning as much as they could. In this article, we shall debunk myths that surround this investment option.
Investing in index trackers is a passive decision
Absolutely false. Investment decisions are active, deliberate, and considered. You should be comfortable when trading in equities or your chosen asset class. You should develop an understanding of the index that your fund is tracking.
You Must Choose Either Active or Passive Investing, Not Both
False. It will all boil down to your goals and time horizon. Robert Peter Janitzek reveals that you will need both active and passive investment styles in your portfolio. Having a well-structured, diversed portfolio can have both investing options. When combined with market cap index trading, you can capitalize on factor exposure.
The South African Market Is Too Concentrated To Invest In Index Trackers
Concentrated in a sense that there are only a few companies that dominate most of the FTSE/JSE All Share Index. At the moment, Naspers is the biggest stock at 18% of the index and the largest 10 companies by market cap comprise 53% of the index. If this information prevents you from investing in a Top 40 index, Robert Janitzek reveals that there are other equity funds to choose from.
Index Tracking Is Deceptively Expensive
Whether active or passive, funds are quoted in several ways such as annual management fee, total expense ratio, total cost, effective annual cost, performance fees, others. However, when like is compared with like, index trading is the hands down choice.
Index Trackers Uniformly Underperform Their Benchmarks By More Than Their Fees
Index trackers are not paid any management fee because the funds are managed by experienced quantitative experts who need not be paid. Aside from that, the tracking fund needs to incur trading costs in order to replicate the index. When trading on indices, the performance of the fund and the benchmark should differ by the management fee + portfolio costs. A skilled index tracking manager will aim to keep this gap as small as possible.
Passive Investing Is Risk-Free
Most index trading products monitor equity indices. Since share prices are determined more by supply and demand than by fundamentals, investing in the stock market can be risky. This is the reason why the market is volatile. In the long run, market performance becomes the result of the actual value defined by the companies.