Investment in the stock markets has historically been very profitable. During the twentieth century in almost any decade buying equities proved to be a good strategy to preserve purchasing power. However, very few investors in that period will have obtained exactly the results that the market averages show.
When we talk about the evolution of the stock market and markets in general, we almost always refer to some index. This index is usually made up of a number of companies and aims to represent an important segment of the market. For example, the S&P 500, one of the most followed indices in the world, represents the equity of large companies in the United States. Its evolution is closely linked to the evolution of the US economy and companies.
Today we live in a very globalized world, and financial markets are increasingly interconnected. In the same way, more and more investors are observing global indices that seek to reflect the evolution of the economy worldwide.
The tools of passive investment
Many private investors realize the difficulty and work involved in obtaining returns above the average of the markets. Some prefer to hire a professional fund manager to invest their money, investing in active management funds, where a professional investor makes decisions and buy and sell transactions in different assets (markets) in order to obtain good returns. However, active management implies higher fees: this professional service in hedge funds has a cost that translates into higher management fees.
As an alternative to this active management, individual investors can also implement a passive investment strategy, which consists of investing in all the companies that make up an index, so that we obtain the average return on that index. Logically, this option does not imply that investors must manually copy the distribution of an index in their portfolio. This would not be operational and would be more expensive.
Instead, there are investment vehicles that allow us to follow that strategy in an automated way, and that also involves lower commissions than active management. These tools available to the investor are funds, both traditional and indexed and publicly traded (ETFs).
Commissions of funds that replicate indexes (indexed and ETFs) have lower management fees than active management funds since it is not necessary for any professional investor to conduct market analysis. The fund simply invests in a weighted way in the companies that make up the index, so that the fund’s profitability will be almost identical to that of the index it replicates.
The main stock market indices
In the United States, the benchmark index of the stock market is the S&P 500. But investors’ vision in the markets is increasingly global because it is increasingly easier to invest in foreign markets from anywhere in the world.
There are indexes and ways of investing that cover almost the entire stock market sector of developed countries in a single investment fund. The simplest and most direct way is to invest in a fund that replicates the evolution of the MSCI World Index, such as the Amundi Index Msci World Ae (Eur) Acc.
The S&P 500 index is one of the most followed in the world as it contains the main North American multinational companies. The following funds replicate its evolution:
- Amundi IS S&P 500 AE-C
- BNY Mellon S&P 500 Idx Tracker EUR A Acc
EURO STOXX 50
This index, prepared by Dow Jones, aims to capture the evolution of the main companies in the eurozone. The following funds replicate its evolution:
- Fidelity Fds EURO STOXX 50® A-Dis-EUR
- BNPP EUROSTOXX50 C
Although the Spanish economy remains small from an international perspective, the country occupies an important place in the European Union and has some important companies. The following funds replicate its evolution:
- IBEX 35 INDEX (ETF)
- Imantia Ibex 35 D FI
What passive fund do I choose?
We have at our disposal a multitude of indexes and funds that replicate the most outstanding indexes at an international level, in order to be able to implement a passive, low-cost, diversified and global investment strategy. There are fund screeners that show all kinds of funds and give the option of filtering those that best fit our investment strategy.
It is possible to select assets such as these funds, or ETFs that allow us to participate in the creation of wealth of the global economy and its evolution, without the need to invest in a multitude of different products. Passive investment strategies are becoming easier and easier for everyone.