The Savvy Investor Index Investing the products used by institutional investors to replicate equity index performance – either via active, passive, or factor-based strategies.
Index investment products are designed to track the movement of selected shares, such as within a stock market index or sector index. Tracking gives insights into the ‘broad market’ movements, which allow institutional investors such as pension funds to compare their own position in terms of returns...
Active investing is a strategy which is purchasing and selling financial instruments to make a profit and outperform a benchmark or indices.
Passive investing is a low-cost tracking strategy which encompasses the monitoring of the market and make little to no investment decisions which impact on a portfolio’s composition (it does not attempt to ‘actively’ outperform).
As active vs. passive investment management has declined in popularity, modern-day fund managers are increasingly replacing the principles of active stock selection with active selection of investment factors – a process known as multi-factor investing. This strategy can thus be used as a relatively low-cost market timing tool.
Stock market, or sector index tracking investments, are now commonplace. However, as institutional demand for new index products has grown, so too has the demand for increasingly specialist and sophisticated index investment strategies. This sophistication is demonstrated through the prevalence of investment 'style' based investing or on the basis of certain attributes – commonly known as factor investing.
The optimum combination of the above strategies encapsulates smart beta – the aim being for fund managers to develop diversified portfolios with enhanced return profiles whilst simultaneously reducing risk. The performance measurement of these strategies is covered in our Performance Analysis topic.
Index Investing pertain to:
- Market Indices (S&P 500, MSCI, FTSE Russell, Nasdaq OMX, Bloomberg)
- Investment factors (Quality, value, momentum, growth, size, volatility)
Further information on conventional index investing, factor investing, and a host of other related material can be found by searching our website.