Index fund

Index funds are mutual funds that replicate as closely as possible a certain representative market index (eg, Dow, Dow Jones Industrial Average ). To achieve this, the Fund may invest, for example, in the index underlying securities in the same proportion as the index. Other funds use derivatives ( swaps) to bind the Fund's performance to the Index.

How exactly is done to replicate the underlying peer group, is indicated by the tracking error. The lower this number is, the similar runs the Fund's performance to that of the benchmark index.

History

Index funds are possible in Germany until the adoption of the 3rd Financial Market Promotion Act in April 1998, as it was not previously allowed by legal limits of the law on investment companies (now succeeded by the Investment Act ) to replicate an index exactly. In the Anglo -Saxon area index funds are very common; in Germany they are playing a growing role and have won in recent years become more important.

The majority of index funds is offered in the form of exchange-traded funds. There are also index funds that were launched as conventional funds.

In Germany in early 2010 were registered 550 index fund at the German stock exchange. The investment volume of these index funds amounted to about 120 billion euros. Across the world, in 2009 approximately 2000 Index fund is listed with an investment volume of 1.03 trillion U.S. dollars by the end of 2009.

Pros and Cons

Unlike index funds in an actively trying gemanagtem fund, the fund manager by a special bond selection, to exceed the performance or the return of an index. A growing number of scientific studies have proven, however, that in some cases more than 90% of actively managed funds its benchmark index can not beat and that the small group of actively managed funds beat their benchmark index in a period of time in their composition changes constantly and next to the period of time can not be predicted. Simply put, this indicates there is no " excellently managed " funds that can beat their benchmark index over a longer period (more than 5 years) permanently. These results provide the basic idea of actively managed funds in question and make passive investments (that is, index funds ) appear superior. Understandably, these scientific results are not without controversy, particularly active portfolio managers, analysts, etc. disagree, because the meaningfulness of their actions is called into question.

The fact that these passively managed funds no active management is necessary, the Management Fee ( TER) of index funds are generally significantly lower than those managed by active fund. Due to this favorable to the investor 's cost structure banks often have no great interest in the active marketing of these products. For professional investors and asset managers, however, index funds play an important role in portfolio construction.

One very popular in Germany alternative to index funds are index certificates, but also a credit risk in relation to the issuer include, as certificates are bearer bonds. In addition, many are not denominated index certificates on a performance index, but on a price index, so that dividends paid by the companies represented in the index not be passed on to the investor.