- Indexed funds stand out for their purpose of replicating stock market indices, such as the S&P 500, with lower commission fees and offering tax efficiency.
- Indexed funds are commonly integrated into the portfolios of asset managers, highlighting their role as fundamental investment instruments in the financial sector.
- FlexFunds offers solutions to fund managers by creating independent investment vehicles. Its asset securitization program stands out for creating ETPs representing various strategies, including indexed funds.
Indexed funds, which have existed since the 1970s, are a type of instrument that seeks to replicate both the composition and behavior of a specific stock index, such as the S&P 500 on Wall Street, generally with lower commission fees but with the same propensity to suffer from market volatility effects.
Asset managers tend to include indexed funds in their investment portfolios since they are among stock investors’ most common investment instruments, unlike other alternatives such as exchange-traded funds.
Despite their similar structure, they differ. While indexed funds are acquired through a management entity based on their net asset value, the latter are traded like stocks, explains the Spanish financial institution Santander1.
Investors contribute to indexed funds, managers act as administrators, and the custodian entity safeguards the resources.
What is the objective of indexed funds?
In these funds, managers do not concentrate their efforts on selecting a basket of assets and developing investment strategies to outperform the markets but rather on fitting the different pieces to match the performance of an index by investing in the same companies that compose it, explains FlexFunds, a firm specialized in the creation and launch of investment vehicles (ETPs).
FlexFunds specializes in providing solutions to fund managers by structuring independent investment vehicles, including products listed on the stock exchange known as ETPs (Exchange-Traded Products).
In particular, FlexFunds uses an asset securitization program to create ETPs representing various investment strategies. These strategies may include indexed funds, Real Estate Investment Trusts (REITs), or private investment funds, among others.
In this type of indexed funds, managers are responsible for managing investors’ resources and investing their funds in the reference asset basket, attempting to achieve similar performance but at a lower cost, as the resources used to achieve their goal are lower compared to a traditional fund.
Indexed funds seek to obtain their returns through so-called passive management, so they are considered easier to manage than other alternatives and provide high diversification with a single product to gain exposure to different asset classes.
How safe are indexed funds?
Like any legal investment type, indexed funds are usually supervised and regulated by various monetary authorities. At the same time, the asset managers who administer them must have the corresponding accreditations to invest the money of the different participants.
Although they are easy to understand and track through the general behavior of the index, specialists point out the need to seek advice from experts to know the indexed investment funds in which one can invest, as indicated by the Spanish bank BBVA2.
Meanwhile, the financial institution ING, based in the Netherlands, states that the main channels for accessing indexed funds include traditional banking, fund managers, or digital investment platforms, which “connect to the wholesale fund market” and facilitate the transaction of these assets3.
What risks are involved in indexed funds?
Indexed funds have a close relationship with the performance of indices, so they are not immune to market volatilities and headwinds they may face, which implies risks in bearish moments for those who opt for this instrument.
Other factors when opting for this instrument include the investment horizon, as they are considered to offer better results in the long term, and the return expectation, as they are structured to replicate an index and not to beat the markets. The costs associated with their management and commissions, among others, must also be considered.
On the other hand, since indexed funds are generally based on passive investment strategies, they usually do not react promptly to price drops in the components of the reference index. Although the fees behind them are usually low, according to a JP Morgan Wealth Management report4, these “will inherently detract from the total investor’s performance.”
Some of the elements to consider when resorting to these types of instruments include analyzing the size of the assets under management and the impact this may have on liquidity. Likewise, other aspects, such as the skill of the indexed fund manager and the fees applied to it, also influence.
In conclusion, indexed funds emerge as an alternative within the wide spectrum of investment vehicles, while their integration into the portfolios of asset managers remains relevant. In this context, FlexFunds becomes an ally for managers by creating independent investment vehicles, facilitating the deployment of diversified investment strategies, including indexed funds, and global distribution to end investors. For more information, contact one of our specialists.
Sources:
- 1 https://www.bancosantander.es/en/faqs/particulares/ahorro-inversion/que-son-fondos-indexados
- 2 https://www.bbva.com/es/salud-financiera/fondos-indexados-ventajas-tienen/
- 3 https://www.ing.es/ennaranja/invertir-dinero/fondos-de-inversion/los-fondos-indexados-una-alternativa-interesante-inversion/
- 4 https://www.chase.com/personal/investments/learning-and-insights/article/what-is-an-index-fund
