Passive ETFs

If you want to get the average return of the market by investing in funds, but don't want to spend too much time and energy choosing funds or tracking the operating strategies of fund managers, then passive ETFs may be your ideal choice.

Passive ETF, whose full name is passive index stock fund, is a fund that tracks, simulates or replicates the performance of an index, such as Taiwan Weighted Index, China A-Share 50 Index, US S&P 500 Index, etc. The characteristic of passive ETF is that it adopts passive management. Fund managers will not adjust the investment portfolio or increase or decrease the investment weight arbitrarily, but try to make the return rate of the fund consistent with the return rate of the underlying index to reduce tracking errors.

Passive ETFs Advantages:

Low fees: Since passive ETFs do not require high research and analysis costs, nor frequent transactions and position adjustments, management fees and transaction costs are relatively low. These fee savings will eventually be reflected in the fund’s net worth and return rate. to allow investors to obtain higher returns.

High transparency: The investment portfolio of passive ETFs and the constituent stocks of the underlying index are completely public. Investors can check the fund’s holding details and weight distribution at any time, and can also compare the differences and performance between funds and indexes. There will be no black box Operational or hidden risk issues.

Good liquidity: Passive ETFs are listed and traded on the stock exchange. Investors can buy and sell at any time during the market, and do not need to wait until the market closes to subscribe or redeem. In addition, passive ETFs also have liquidity providers (LPs) responsible for providing buying and selling quotes to facilitate investors' entry and exit into the market and increase market depth and breadth.

Tax benefits: According to my country's tax laws, passive ETFs do not need to pay securities transaction tax when they are physically subscribed or bought back. They only need to pay when buying and selling in the secondary market. This can reduce the impact of tax burden and improve investment efficiency.

Risks and Limitations:

Although passive ETFs have many advantages, they also have some risks and limitations. Investors should pay attention to the following when choosing:

Market risk: The price of passive ETFs will fluctuate due to economic, political, monetary, legal and other factors that affect the market. If the market as a whole declines, passive ETFs will also fall accordingly, and investors may face the risk of principal loss.

Concentration risk: Passive ETFs usually hold a diversified basket of investment portfolios and are less affected by individual underlying risks. However, some passive ETFs may still have exposure concentrated in a few stocks or concentrated investments in specific industries or single commodities. If Adverse changes in these underlying assets will also affect the performance of passive ETFs.

Discount and premium risk: The market price of passive ETFs is determined by market supply and demand, and may be lower or higher than the net value of the fund, resulting in a discount or premium. Excessive discounts and premiums represent deviations in the transaction price of passive ETFs, which may affect investors' buying and selling timing and costs. In addition, passive ETFs that link to overseas targets may experience discounts or premiums due to the difference in trading time between domestic and foreign markets.

Tracking error risk: Tracking error refers to the difference between the return rate of a passive ETF and the return rate of the underlying index. Tracking errors occur for many reasons, including the impact of fees and expenses that the fund must pay, differences between fund assets and index constituents, exchange rate differences between the fund's denominated currency, trading currency and investment currency, and the components of a passive ETF portfolio. Allotment of shares and dividends, tracking tools and copy strategies used by fund managers, etc., will all cause a gap between the net asset value of passive ETFs and the stock price index.

To sum up, passive ETF is a simple, convenient, low-cost, and highly transparent investment tool suitable for investors who want to hold it for a long time and enjoy average market returns. However, passive ETFs are not omnipotent, nor are they without risks. When choosing, investors should carefully compare passive ETFs of different types and issuers based on their own risk tolerance, investment goals and time windows, and pay attention to their correlations. factors such as fees, discounts, premiums and tracking errors to achieve the best investment results.