Passive investment funds are increasingly popular with savvy investors. They allow investors to gain exposure to a whole share index with low fund fees. Here, I take a look at the six most popular passive funds in February, according to figures from Interactive Investor, and explore what passive funds can add to your portfolio.
What are passive investment funds?
Passive investment funds are different to actively managed funds. They invest in a whole share index, whereas active funds involve fund managers picking and choosing which stocks to buy. For example, a UK passive fund invests in the whole of the FTSE 100 index or the whole of the FTSE All-Share index. Passive funds are also sometimes called tracker funds because they aim to track a whole share index.
Because passive investment funds don’t need an active fund manager, they’re often a lot cheaper to buy than traditional funds. You can invest in a passive fund from around 0.06% to 0.2% in annual fund fees.
The most popular passive investment funds
Vanguard takes four of the top five spots for the most popular passive investment funds in February. They’re known for their passive funds and offer a choice of over 70 funds. The most popular are their LifeStrategy funds. These funds aim to replicate a balanced investment portfolio with just one fund.
They track a range of different share indices and are diversified across many geographies.
1. Vanguard LifeStrategy 80% Equity (3-year return: 30.1%)
This Vanguard fund is the first of three LifeStrategy funds in the top six. This fund invests 80% in equities and 20% in bonds. Bond prices tend to grow less than equity over time, but they also benefit from more price stability and usually hold their price when there’s a stock market crash.
The equity portion of this fund is diversified across indexes in the US, UK, Europe, Japan, the Pacific region and emerging markets.
2. Vanguard LifeStrategy 100% Equity (3-year return: 36.1%)
This fund is second on the top of the pops for passive investment funds. It is designed for more adventurous investors that want to be invested 100% in equity, rather than owning any bonds.
Like the 80% fund, your investments will be diversified across indexes in the US, Europe, UK, Japan, the Pacific region and emerging markets.
3. Vanguard LifeStrategy 60% Equity (3-year return: 24.1%)
For more cautious investors, the Vanguard LifeStrategy 60% Equity fund is extremely popular. This fund is popular with cautious investors that want a traditional 60%/40% split between equities and bonds. It’s likely to fluctuate less than the 100% fund but may also increase less in price over time.
4. L&G Global Technology Index (3-year return: 110%)
This technology fund has slipped down from second place in January. It tracks the shares in technology companies from the developed and advanced emerging markets that are included in the FTSE World Index.
The fall in investment may reflect investors’ growing caution about tech stocks as some experts think they may be overvalued.
5. Vanguard FTSE Global All Cap Index (3-year return: 41.1%)
This Vanguard fund, currently sitting in fifth place, is a fund that tracks the Global All Cap index. That means it’s diversified across North America, Europe, the Pacific region, the Middle East and emerging markets.
It could be a low-cost way to spread your investment risk across many geographies and companies with one simple fund.
6. Vanguard FTSE UK Equity Income Index (3-year return: 17%)
Yet another Vanguard fund is in sixth place. It’s a UK-based fund and invests in shares listed on the London Stock Exchange that are expected to pay higher dividends than average. That means you may benefit from high dividend income as well as, hopefully, share price growth.
Why are passive investment funds so popular?
Passive funds have been growing in popularity for several reasons, including:
- Low cost: annual fund fees start at around 0.06%.
- Diversified: passive funds are invested in a whole index rather than just a few companies.
- Less room for human error: passive investing funds aren’t prone to the risk that comes from fund managers sometimes picking the wrong shares.
However, like any equity investments, passive funds may not be suitable for short-term investors. That’s because share prices fluctuate significantly over time and short-term investors won’t have time to wait for the market to bounce back from a slump.
How can you invest in passive income funds?
You can invest in passive investment funds through a stocks and shares ISA, a share dealing account or a pension scheme.
There’s still time to use your £20,000 stocks and shares ISA allowance before 5 April. If you want some ideas, then check out our top-rated stocks and shares ISAs. Whether you’re an experienced investor or just starting out, we have reviewed ISAs that may be suitable for you.