When it comes to fund savings, investors can choose between passive (ETF) and active investment styles. We explain the main differences between the two approaches.
The Passive Style: ETFs
Exchange-traded funds, or ETFs for short, are becoming increasingly popular with private investors. The keys to success are the relatively simple design of these funds. The performance of the funds is, therefore, easy to understand because it closely follows the respective index.
Advantages: Since ETFs do not require active management, they are usually cheaper than managed equity funds. Stock selection is very transparent, and ETFs are well suited for passive buy-and-hold strategies.
Please note: The exchange-traded index funds are not the only patent solution for asset accumulation, because an ETF is not only subject to the opportunities, but also to the risks of the respective index—passive investing works particularly well when the stock markets are up for a long time. However, if an index is down, the corresponding ETF follows this path unchecked.
Conclusion: The “passive” investment style using ETFs is particularly suitable for investors who want to participate in the general development of the capital markets – knowing that they can never do better than the market as a whole. Experienced investors, in particular, can use ETFs as a mix when they want to bet on specific markets.
The Active Style: Asset Management Funds
Asset management funds are investment funds that, in addition to stocks or bonds, can use a wide range of assets such as real estate, raw materials or precious metals. Professional fund managers make the selection of investment goals that are suitable for the respective risk profile of the asset management fund.
Advantages: The investor benefits from active protection against market risks. The fund management can intervene in difficult phases on the stock exchange, reduce the equity quota and switch to more promising asset classes.
Please note: Risk appetite and the choice of asset classes for asset management funds depend heavily on the investment philosophy of the respective asset manager. Since the fund’s portfolio can be composed very differently, direct performance comparison with equity funds or ETFs is not necessarily meaningful.
Conclusion: Asset management funds are an ideal basis for long-term asset accumulation. When selecting funds, private investors should pay attention to high management quality and performance over a more extended period of time (at least five years), which also includes avoiding sharp price falls.
Your Risk Appetite Is Decisive
Private investors should decide individually based on their market knowledge, whether active or passive investments represent the right investment strategy. The selection of ETFs and asset management funds should always match the risk appetite and preferences of the investor. A mixture of both worlds can also represent a sensible investment strategy.