Exploring the Different Types of Passive Investment Management Strategies

Investment management is a critical aspect of financial planning for individuals and businesses alike. Passive investment management strategies have become increasingly popular due to their cost-effectiveness and low-risk approach. There are two main types of passive investment management strategies: index funds and exchange-traded funds (ETFs). Both strategies aim to provide investors with broad market exposure while minimizing costs and maximizing returns. In this article, we will explore the differences between these two strategies and how they can be used to achieve long-term financial goals. Whether you’re a seasoned investor or just starting out, understanding the basics of passive investment management strategies is essential for building a strong investment portfolio.

Understanding Passive Investment Management

Definition of Passive Investment Management

Passive investment management is an investment strategy that aims to match the performance of a particular market index, rather than attempting to beat it through active management. This approach involves investing in a diversified portfolio of stocks, bonds, or other securities that replicate the composition of a specific index, such as the S&P 500 or the Dow Jones Industrial Average. The goal of passive investment management is to achieve the same returns as the index, while minimizing costs and reducing the risk of underperformance.

Passive investment management differs from active management, which involves using research and analysis to select individual securities or asset classes that are expected to outperform the market. Active managers aim to achieve higher returns than the market index, but this approach often involves higher costs and a greater risk of underperformance.

Passive investment management has gained popularity in recent years due to its lower costs and the ability to achieve market returns with less effort. Index funds, exchange-traded funds (ETFs), and other types of passive investment vehicles have become increasingly popular among individual investors and institutional investors alike. By using passive investment management strategies, investors can achieve their financial goals with less effort and lower costs, while still benefiting from the overall growth of the market.

Advantages of Passive Investment Management

One of the main advantages of passive investment management is its low cost. Because passive investment strategies typically track a specific index or market, they do not require as much research, analysis, and trading as active investment strategies. This means that passive investment funds typically have lower expense ratios, which can translate into higher returns for investors over time.

Another advantage of passive investment management is its tax efficiency. Because passive investment strategies typically involve less trading, they generate fewer capital gains, which can reduce the tax burden for investors. In addition, passive investment funds often use tax-efficient strategies, such as indexing, which can further minimize taxes.

Passive investment management also offers a diversification benefit. By investing in a broad market index or a diversified portfolio of assets, investors can achieve a more diversified portfolio, which can help reduce risk and improve returns over time. This is particularly beneficial for investors who may not have the time, expertise, or resources to actively manage their investments.

Lastly, passive investment management offers a simple and straightforward approach to investing. Passive investment strategies typically involve investing in a diversified portfolio of assets that track a specific index or market, which can be easy to understand and implement. This can be particularly appealing to investors who are new to investing or who may not have a strong understanding of the stock market or other financial markets.

Disadvantages of Passive Investment Management

Passive investment management, while having its advantages, also has several disadvantages that should be considered by investors. These disadvantages include:

• Lack of Flexibility: Passive investment strategies typically follow a specific index or benchmark, which means that they are less flexible than active management strategies. This can limit the ability of investors to adjust their portfolios in response to changing market conditions.
• Limited Diversification: Passive investment strategies may not provide the same level of diversification as active management strategies. This is because passive funds tend to hold a concentrated number of securities, which can increase the risk of market volatility.
• No Guarantee of Outperformance: Passive investment strategies do not guarantee outperformance compared to the benchmark index. This means that investors may not achieve the same returns as the market, which can be a significant disadvantage in the long run.
• No Proactive Management: Passive investment strategies do not involve proactive management of the portfolio. This means that investors do not have the same level of control over their investments as they would with an active management strategy.
• No Ability to Timing the Market: Passive investment strategies do not involve timing the market. This means that investors may not be able to take advantage of market trends or opportunities, which can be a significant disadvantage in the long run.
• Lack of Customization: Passive investment strategies may not be customized to meet the specific needs of individual investors. This means that investors may not be able to tailor their portfolios to their specific goals, risk tolerance, and investment horizon.
• Higher Fees: Passive investment strategies may have higher fees compared to active management strategies. This is because passive funds tend to have higher expense ratios, which can eat into investment returns over time.

Overall, while passive investment management has its advantages, it is important for investors to understand the disadvantages as well. By considering both the advantages and disadvantages, investors can make informed decisions about their investment strategies.

Types of Passive Investment Management Strategies

Index Funds

Definition of Index Funds

Index funds are a type of passive investment management strategy that aims to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. These funds invest in a diversified portfolio of stocks that match the composition of the index they track.

Advantages of Index Funds

1. Low Cost: Index funds have lower expense ratios compared to actively managed funds, making them a cost-effective investment option.
2. Diversification: Index funds provide exposure to a broad range of stocks, reducing the risk associated with investing in individual stocks.
3. Simplicity: Index funds are easy to understand and require minimal monitoring, making them suitable for long-term investors.
4. Tax Efficiency: Index funds have a lower turnover rate compared to actively managed funds, resulting in lower capital gains distributions and lower tax implications for investors.

Disadvantages of Index Funds

1. Lack of Active Management: Index funds do not offer the potential for outperformance that can be achieved through active management.
2. Limited Potential for Capital Appreciation: Index funds typically track the performance of a specific market index, limiting their potential for capital appreciation compared to individual stocks or sectors.
3. Tracking Error: Index funds may not perfectly replicate the performance of the index they track due to factors such as transaction costs, cash balances, and management fees.
4. Lack of Flexibility: Index funds may not be suitable for investors with specific investment objectives or time horizons.

Exchange-Traded Funds (ETFs)

Definition of ETFs

Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges, much like individual stocks. They are designed to track the performance of a specific index, such as the S&P 500, or a specific market sector, such as technology or healthcare. ETFs can be bought and sold throughout the trading day, and their prices fluctuate based on supply and demand.

Advantages of ETFs

One of the main advantages of ETFs is their low cost. They typically have lower expense ratios than actively managed funds, making them an attractive option for investors looking to minimize costs. Additionally, ETFs offer a high degree of diversification, as they can hold a broad range of assets, such as stocks, bonds, and commodities. This makes them a good choice for investors looking to spread their risk across multiple asset classes.

Another advantage of ETFs is their flexibility. Investors can buy and sell ETFs throughout the trading day, allowing them to quickly respond to changes in the market. They can also use ETFs to gain exposure to specific sectors or themes, such as green energy or emerging markets.

Disadvantages of ETFs

One potential disadvantage of ETFs is their lack of flexibility compared to actively managed funds. ETFs are designed to track a specific index or sector, which means they may not perform as well as actively managed funds in certain market conditions. Additionally, ETFs may be subject to tracking error, which occurs when the ETF’s performance deviates from the underlying index.

Another potential disadvantage of ETFs is their liquidity. While ETFs are generally more liquid than individual stocks, they may not be as liquid as actively managed funds. This is because ETFs may not have as many buyers and sellers, which can result in wider bid-ask spreads and lower liquidity.

In conclusion, ETFs are a popular form of passive investment management that offer low costs, diversification, and flexibility. However, they may not be suitable for all investors, and it is important to carefully consider the potential advantages and disadvantages before investing in ETFs.

Comparison of Index Funds and ETFs

Similarities between Index Funds and ETFs

Although Index Funds and ETFs have their own unique characteristics, they share several similarities that make them attractive options for passive investment management. Here are some of the key similarities between Index Funds and ETFs:

• Both are passively managed investment vehicles: Index Funds and ETFs are designed to track a specific market index, such as the S&P 500, rather than attempting to beat the market through active management. This passive approach allows investors to benefit from the overall performance of the market without trying to time the market or pick individual stocks.
• Low cost: Both Index Funds and ETFs have lower expense ratios compared to actively managed funds, making them an attractive option for long-term investors who are looking to maximize their returns. The low cost structure of these investment vehicles allows investors to keep more of their returns, as there are no high fees associated with the management of the funds.
• Diversification: Index Funds and ETFs provide investors with exposure to a broad range of stocks, which helps to diversify their portfolios and reduce risk. By investing in a fund that tracks a broad market index, investors can gain exposure to a variety of industries and sectors, which can help to mitigate the impact of a poor-performing stock or sector.
• Transparency: Both Index Funds and ETFs are required to disclose their holdings on a daily basis, which provides investors with transparency into the composition of the fund. This transparency allows investors to easily compare the holdings of different funds and make informed investment decisions.
• Liquidity: Both Index Funds and ETFs are highly liquid investment vehicles, which means that investors can buy and sell their shares quickly and easily. This liquidity is particularly important for investors who may need to access their funds quickly in case of an emergency or market downturn.

Overall, the similarities between Index Funds and ETFs make them attractive options for investors who are looking for a low-cost, diversified, and transparent way to invest in the market. While there are some differences between the two investment vehicles, the similarities provide a solid foundation for investors to build their passive investment strategies.

Differences between Index Funds and ETFs

While both index funds and ETFs are considered passive investment management strategies, there are several differences between the two. Here are some of the key differences:

1. Structure
   • Index funds are mutual funds that are bought and sold at the end of the trading day at the net asset value (NAV) price.
   • ETFs, on the other hand, are traded on stock exchanges like individual stocks, and their prices fluctuate throughout the trading day based on supply and demand.
2. Expense Ratio
   • Index funds typically have higher expense ratios than ETFs because they have higher operating costs due to the need to buy and sell securities to match the index.
   • ETFs, on the other hand, can be more cost-effective because they can be traded on an exchange, which reduces the need for frequent buying and selling of securities.
3. Liquidity
   • Index funds can be less liquid than ETFs because they are bought and sold at the end of the trading day.
   • ETFs, on the other hand, can be bought and sold throughout the trading day, making them more liquid.
4. Tax Efficiency
   • Index funds are typically more tax-efficient than ETFs because they are bought and sold at the end of the trading day, which reduces the need for frequent buying and selling of securities and results in fewer capital gains distributions.
   • ETFs, on the other hand, can be less tax-efficient because they are traded on an exchange, which can result in more frequent buying and selling of securities and higher capital gains distributions.
5. Diversification
   • Index funds are typically more diversified than ETFs because they hold a broad range of securities that match the index.
   • ETFs, on the other hand, can be less diversified because they focus on specific sectors or themes, which can increase the risk of exposure to individual companies or sectors.

Overall, both index funds and ETFs have their advantages and disadvantages, and investors should carefully consider their investment goals, risk tolerance, and investment horizon before choosing between the two.

Factors to Consider When Choosing a Passive Investment Management Strategy

Investment Goals

When choosing a passive investment management strategy, it is important to consider your investment goals. These goals will help guide your decision-making process and ensure that you select a strategy that aligns with your financial objectives.

Here are some key factors to consider when evaluating your investment goals:

• Risk tolerance: Your risk tolerance will play a significant role in determining the type of passive investment management strategy that is right for you. If you have a high risk tolerance, you may be more comfortable with a strategy that involves a higher degree of risk, such as investing in individual stocks. On the other hand, if you have a low risk tolerance, you may prefer a strategy that involves a lower degree of risk, such as investing in bonds.
• Time horizon: Your time horizon is another important factor to consider when evaluating your investment goals. If you have a long-term time horizon, you may be more willing to take on a higher degree of risk in pursuit of higher returns. If you have a short-term time horizon, you may be more risk-averse and prefer a strategy that involves a lower degree of risk.
• Diversification: Diversification is an important consideration when evaluating your investment goals. By diversifying your portfolio, you can reduce your exposure to any one particular investment and minimize your risk. This is especially important if you have a long-term time horizon and are looking to achieve long-term growth.
• Liquidity: Liquidity refers to the ease with which you can convert your investments into cash. If you need to access your investments quickly, you may prefer a strategy that involves more liquid investments, such as bonds or money market funds. If you have a longer time horizon and are not in need of immediate access to your investments, you may be more willing to invest in less liquid assets, such as real estate or private equity.

Overall, it is important to carefully evaluate your investment goals when choosing a passive investment management strategy. By taking the time to understand your goals and the factors that will influence your decision-making process, you can select a strategy that is well-suited to your needs and helps you achieve your financial objectives.

Risk Tolerance

When it comes to choosing a passive investment management strategy, one of the most important factors to consider is your risk tolerance. Risk tolerance refers to your willingness and ability to take on investment risk in pursuit of higher returns. It is important to note that passive investment strategies are generally considered to be lower risk than active investment strategies, but they still carry some level of risk.

Here are some key points to consider when evaluating your risk tolerance:

• Risk and reward: Generally, the higher the potential return on an investment, the higher the level of risk. This means that if you are comfortable with taking on more risk, you may be able to achieve higher returns over the long term.
• Time horizon: If you have a longer time horizon, you may be able to tolerate more risk, as you have more time to recover from potential losses. On the other hand, if you have a shorter time horizon, you may want to take on less risk to avoid potential losses that could impact your ability to achieve your financial goals.
• Diversification: Diversification is a key risk management strategy that can help you reduce your overall risk exposure. By investing in a variety of assets, you can spread your risk across different asset classes and reduce the impact of any one investment on your overall portfolio.
• Investment objectives: Your investment objectives can also play a role in your risk tolerance. If your objective is to grow your wealth over the long term, you may be willing to take on more risk in pursuit of higher returns. On the other hand, if your objective is to preserve your wealth, you may want to take on less risk to avoid potential losses.

Overall, it is important to carefully evaluate your risk tolerance when choosing a passive investment management strategy. By considering your risk tolerance, you can help ensure that you are investing in a way that is aligned with your financial goals and risk tolerance level.

Fees and Expenses

When selecting a passive investment management strategy, it is crucial to consider the fees and expenses associated with the chosen approach. These costs can significantly impact the overall returns on your investment and should not be overlooked. Here are some key points to keep in mind:

• Management Fees: Management fees are charged by the investment manager for their services in managing the passive investment strategy. These fees can vary depending on the type of investment and the manager’s expertise. It is essential to compare management fees across different passive investment strategies to ensure you are getting the best value for your money.
• Expense Ratio: The expense ratio is the annual fee charged by the investment manager to cover the operating expenses of the investment vehicle. This fee is typically expressed as a percentage of the total assets under management. It is important to note that the expense ratio can vary depending on the type of investment vehicle, such as mutual funds or exchange-traded funds (ETFs). Therefore, it is crucial to compare the expense ratios of different investment vehicles before making a decision.
• Transaction Costs: Transaction costs are the fees charged by brokers or financial institutions for buying and selling securities. These costs can add up over time and can significantly impact the overall returns on your investment. It is important to consider the transaction costs associated with the chosen passive investment strategy and compare them to other available options.
• Taxes: Taxes can also be a significant factor to consider when choosing a passive investment management strategy. Different investment vehicles have different tax implications, such as capital gains taxes or dividend taxes. It is essential to understand the tax implications of each investment vehicle and how they may impact your overall returns.

In conclusion, fees and expenses are a critical factor to consider when choosing a passive investment management strategy. By carefully evaluating the management fees, expense ratios, transaction costs, and tax implications of different investment vehicles, you can make an informed decision that aligns with your investment goals and objectives.

Tax Efficiency

When choosing a passive investment management strategy, tax efficiency should be a crucial factor to consider. Passive investment strategies aim to minimize costs and maximize returns, and tax efficiency is an essential aspect of achieving these goals.

Here are some key points to consider when evaluating the tax efficiency of a passive investment management strategy:

• Tax implications of different investment vehicles: Different investment vehicles, such as index funds and exchange-traded funds (ETFs), have different tax implications. For example, ETFs are generally more tax-efficient than actively managed funds because they are structured as passive investment vehicles. Index funds, on the other hand, are subject to capital gains taxes when units are sold, which can result in taxes being passed on to investors.
• Tax-efficient investment strategies: Some passive investment strategies are more tax-efficient than others. For example, strategies that involve tax-loss harvesting or tax-efficient asset allocation can help minimize taxes and maximize after-tax returns.
• Considering the impact of dividends: Dividends can have a significant impact on the tax efficiency of a passive investment strategy. Some strategies, such as those that focus on high-dividend-yielding stocks, may be more tax-efficient than others.
• Tax-efficient rebalancing: Regular rebalancing is an essential aspect of maintaining a well-diversified portfolio. However, it is essential to consider the tax implications of rebalancing, as it can result in capital gains taxes. Tax-efficient rebalancing strategies, such as those that involve using loss harvests to offset gains, can help minimize taxes and maximize after-tax returns.

In conclusion, tax efficiency is an essential factor to consider when choosing a passive investment management strategy. By evaluating the tax implications of different investment vehicles, tax-efficient investment strategies, the impact of dividends, and tax-efficient rebalancing, investors can make informed decisions that help minimize taxes and maximize after-tax returns.

Diversification

When choosing a passive investment management strategy, diversification is a crucial factor to consider. Diversification is the process of spreading investments across different asset classes, sectors, and geographies to minimize risk and maximize returns.

There are several ways to diversify a passive investment portfolio, including:

• Investing in a broad market index fund that tracks a diverse range of companies across multiple sectors
• Investing in a global index fund that tracks a diverse range of companies across multiple countries
• Investing in a bond index fund that tracks a diverse range of bonds with different maturities and credit ratings
• Investing in a real estate index fund that tracks a diverse range of properties across multiple sectors

By diversifying your passive investment portfolio, you can reduce the impact of any single investment on your overall portfolio and help to protect your investments from market volatility. It is important to note that diversification does not guarantee a profit or protect against loss, but it can help to mitigate risk and potentially improve returns over the long term.

Investment Horizon

When selecting a passive investment management strategy, the investment horizon is a crucial factor to consider. The investment horizon refers to the length of time an investor plans to hold their investments. Different investment horizons require different passive investment management strategies.

Short-Term Investment Horizon

For investors with a short-term investment horizon, it is advisable to avoid passive investment strategies altogether. This is because passive investment strategies typically involve investing in a diversified portfolio of stocks, bonds, or other securities, which can result in fluctuating values over short periods. Instead, short-term investors may consider active management strategies that can help them achieve their investment goals within a shorter time frame.

Medium-Term Investment Horizon

For investors with a medium-term investment horizon, passive investment strategies such as index funds and exchange-traded funds (ETFs) can be a good option. These investment vehicles track a specific market index, such as the S&P 500, and provide exposure to a diversified portfolio of stocks. This can help medium-term investors achieve their investment goals while minimizing the impact of market volatility.

Long-Term Investment Horizon

For investors with a long-term investment horizon, passive investment strategies are often the preferred choice. This is because over the long term, passive investment strategies tend to outperform active management strategies. For example, studies have shown that over the past 90 years, the S&P 500 index has averaged an annual return of around 10%, while actively managed large-cap equity funds have averaged an annual return of around 6%. This suggests that long-term investors can benefit from the lower costs and tax efficiency of passive investment strategies.

In conclusion, the investment horizon is an important factor to consider when choosing a passive investment management strategy. Investors with a short-term investment horizon may prefer active management strategies, while those with a medium-term or long-term investment horizon may benefit from passive investment strategies such as index funds or ETFs.

Recap of Key Points

• Investment Objectives: Identify your financial goals and risk tolerance to determine the most suitable passive investment strategy for you.
• Investment Horizon: Your investment time horizon will influence the choice of passive investment strategy. Short-term investments may require a more conservative approach, while long-term investments can allow for more aggressive strategies.
• Diversification: A well-diversified portfolio can help minimize risk and enhance returns. Consider the mix of assets in your passive investment strategy to ensure a balanced portfolio.
• Fees and Expenses: Passive investment strategies typically have lower fees compared to active management. However, it’s essential to consider the costs associated with investment products and services to ensure they align with your financial objectives.
• Tax Efficiency: Some passive investment strategies, such as index funds and ETFs, are known for their tax efficiency. Consider the tax implications of different investment products when choosing a passive investment strategy.
• Investment Vehicle: Choose the right investment vehicle for your passive investment strategy. For example, mutual funds, exchange-traded funds (ETFs), and index funds are popular options for passive investors.
• Market Index: If you opt for an index fund or ETF, consider the market index you want to track. Popular indexes include the S&P 500, Russell 2000, and NASDAQ.
• Asset Allocation: Determine the appropriate asset allocation for your passive investment strategy. This may involve a mix of stocks, bonds, and other assets based on your risk tolerance and investment objectives.
• Rebalancing: Regularly review and rebalance your passive investment portfolio to ensure it remains aligned with your investment objectives and risk tolerance.
• Monitoring and Review: Regularly monitor and review your passive investment strategy to stay informed about market conditions and make any necessary adjustments to your investment approach.

Importance of Understanding Passive Investment Management Strategies

Understanding passive investment management strategies is crucial for investors looking to grow their wealth over time. Passive investment strategies are designed to mirror the performance of a particular market index, such as the S&P 500, by investing in a diversified portfolio of stocks that mirror the composition of the index. By doing so, investors can achieve returns that are in line with the overall performance of the market, without having to actively pick and choose individual stocks or time the market.

Passive investment strategies are also known for their low cost and tax efficiency, as they tend to have lower fees and turnover compared to actively managed funds. This can result in significant savings for investors over time, as even small differences in fees and taxes can add up over the long term.

In addition, passive investment strategies are generally considered to be more transparent and predictable than actively managed funds. Since they are designed to mirror the performance of a particular market index, investors can easily track the performance of their investments and make informed decisions based on the market trends.

Overall, understanding passive investment management strategies is essential for investors who are looking to achieve long-term growth and diversification in their portfolios. By choosing the right passive investment strategy, investors can potentially achieve market returns while minimizing costs and taxes, and enjoying the benefits of transparency and predictability.

Recommendations for Further Reading

If you’re interested in learning more about passive investment management strategies, there are several books and resources available that can provide further insights and guidance. Here are some recommendations for further reading:

1. The Intelligent Investor by Benjamin Graham – This classic book on value investing provides a comprehensive overview of the principles and strategies of passive investing.
2. A Random Walk Down Wall Street by Burton G. Malkiel – This book provides an overview of the history of investment management and discusses the benefits and drawbacks of passive investing.
3. The Little Book of Common Sense Investing by John C. Bogle – This book provides an introduction to the principles of passive investing and the benefits of index funds.
4. Passive Investing: The Smart Way to Invest Your Money by Rich Presta – This book provides a comprehensive overview of passive investing strategies and discusses the pros and cons of different approaches.
5. Index Funds: A Beginner’s Guide to Index Investing by Scott F. Chester – This book provides an introduction to index funds and the principles of passive investing.
6. The Four Pillars of Investing by William J. Bernstein – This book provides an overview of the history of investment management and discusses the benefits and drawbacks of passive investing.
7. Investing in Index Funds by J.L. Collins – This book provides a comprehensive overview of index funds and the principles of passive investing.
8. The Essays of Warren Buffett: Lessons for Investors and Managers by Warren E. Buffett – This book provides insights into the investment philosophy of Warren Buffett, who is a proponent of passive investing.
9. The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf – This book provides a comprehensive overview of passive investing strategies and discusses the pros and cons of different approaches.
10. The Simple Path to Wealth by JL Collins – This book provides a comprehensive overview of passive investing strategies and discusses the pros and cons of different approaches.

These resources can provide valuable insights and guidance for those interested in exploring the different types of passive investment management strategies.

FAQs

1. What are passive investment management strategies?

Passive investment management strategies are investment approaches that aim to match the performance of a specific market index or benchmark, rather than attempting to beat it. These strategies are designed to be cost-effective and tax-efficient, as they involve little or no active management.

2. What are the two types of passive investment management strategies?

The two main types of passive investment management strategies are index funds and exchange-traded funds (ETFs). Index funds are mutual funds or exchange-traded funds that are designed to track the performance of a specific market index, such as the S&P 500. ETFs are similar to index funds, but they are traded on an exchange like stocks, and they can be bought and sold throughout the trading day.

3. What are the benefits of passive investment management strategies?

Passive investment management strategies offer several benefits, including low costs, tax efficiency, and diversification. Since these strategies aim to match the performance of a specific market index or benchmark, they typically have lower fees than actively managed funds. Additionally, passive funds are often more tax-efficient than actively managed funds, as they have lower turnover rates and are less likely to generate capital gains taxes. Finally, passive investment strategies offer diversification benefits, as they allow investors to gain exposure to a broad range of assets at a low cost.

4. What are the risks of passive investment management strategies?

Passive investment management strategies have some risks, including the risk of tracking error and the risk of market volatility. Tracking error is the difference between the performance of a passive fund and its benchmark index. While this risk is generally low, it can occur when a fund’s management team makes active decisions that deviate from the index’s composition. Market volatility is another risk associated with passive investment strategies, as these funds will experience the same ups and downs as the broader market.

5. What are the differences between index funds and ETFs?

Index funds and ETFs are similar in that they both aim to track the performance of a specific market index or benchmark. However, there are some key differences between the two. Index funds are typically mutual funds, which are bought and sold at the end of the trading day at the net asset value (NAV) price. ETFs, on the other hand, are traded on an exchange like stocks, and they can be bought and sold throughout the trading day at market prices. Additionally, ETFs often have lower expense ratios than index funds, as they have lower management fees and trading costs.

Video 11: Active vs passive management