Morningstar's Guide to Passive Investing
Here's how to make the most of the passive strategies available today.
This article is part of Morningstar's Guide to Passive Investing special report.
U.S. investors have wholeheartedly embraced passive investing. Nearly $6.7 trillion rested in passive funds at the end of 2017. While actively managed U.S. equity funds saw $207 billion in outflows last year, passive U.S. equity funds raked in $220 billion in new money. Not to be outdone, passive taxable-bond and international-equity funds each also enjoyed inflows in excess of $200 billion last year. Clearly, indexing is no longer something investors do just for cheap U.S. equity exposure.
Indexing's broad-based success is understandable. Passive funds are usually lower cost than actively managed options in the same category. Their performance is typically marketlike, closely hugging the index that the fund tracks minus expenses. Passive strategies also avoid key-person risk--a manager departure isn't a big deal when the manager isn't actively performing security selection. Often, index funds are more tax-friendly than their actively managed counterparts.
Yet there's a growing complexity to being an index investor today. Funds are tracking dozens of indexes, both publicly available and home-grown. They may be weighting their portfolio holdings by a factor other than market capitalization, such as low price or momentum, for example. Some index funds are more tax efficient than others. And while most index funds are reasonably priced, some are obviously cheaper than others--and given the fee wars that passive fund providers are engaged in, today's cheapest choice could be overthrown tomorrow.
All this week we'll be tackling the issues that matter most to index investors and providing Morningstar's favorite passive funds and ETFs along the way.
Monday: An Overview of Passive Investing
5 Common Misconceptions about Index Funds
Clearing up confusion about tax efficiency, total costs, and whether every market segment can be effectively indexed.
Traditional Index Fund vs. ETF Cage Match
How do the two vehicles stack up when it comes to costs, trading capabilities, taxes, and other features?
How Low Can ETF Fees Go?
ETF providers are working hard to bring down fees--even those that aren't reflected in expense ratios, says Ben Johnson.
Zombie Index Funds Are Delivering Frightening Tax Bills
Investors have been fleeing some index funds in droves, resulting in large capital gains distributions.
Partnering With Passive Fund Sponsors That Have Your Back
What to look for in passive parents.
6 Traits of the Best Indexes
Finding an index that scores well across these six dimensions can help investors choose among seemingly similar funds.
Tuesday: Investing Passively in U.S. Equities
Our Favorite Core Passive Funds and ETFs
If you're in the market for a passive core holding, these low-cost large-cap index funds are a great place to start.
Our Favorite Passive Supporting Players
A low-cost passive fund can be a great way to get smaller-cap exposure.
A Closer Look at 3 Strong Multifactor ETFs
These exchange-traded funds are all worthy of consideration, but there are important differences among them that can affect their performance.
Wednesday: Investing Passively Abroad
Our Favorite International-Stock Passive Funds and ETFs These 21 highly rated index funds and ETFs offer diversified low-cost exposure to foreign stocks.
Market-Cap-Weighting Dials Up Country Concentration in Emerging Markets
Emerging-markets index-tracking funds hold large stakes in Chinese stocks.
Thursday: Investing Passively in Fixed Income
Our Favorite Core Passive Bond Funds and ETFs
Passive bond funds such as these 15 Silver medalists have increasingly captured investors' attention.
Beware of Rate Risk in Passive Core Bond Funds
Passive core bond funds have some advantages, but don’t expect protection when interest rates rise.
An Overview of the Passive Bond Funds Landscape
Alex Bryan offers his favorite passively managed core funds and ETFs.
Bond ETFs Don’t Keep the Taxman Away
Despite their structural tax advantages, bond ETFs can still expose investors to significant tax liabilities.
Friday: Passive Model Portfolios
3 ETF Retirement Bucket Portfolios for Taxable Accounts
These tax-efficient portfolios are geared toward retirees who are seeking simplicity and balance.
3 ETF Retirement Saver Portfolios for Taxable Accounts
Composed of broad-market equity ETFs and smaller allocations to municipal bonds, these portfolios are designed for retirement savers' taxable accounts.