Index funds play a more important role

Passive investment approach

As the name suggests, index funds aim to replicate the securities and weightings of a specific index to achieve returns and risk performance similar to that index. This approach is known as passive investing, in contrast to actively managed funds, where fund managers frequently buy and sell securities to generate additional returns. Index funds only trade when there are changes in the index components. For example, the Tracker Fund of Hong Kong is an index fund that tracks the Hang Seng Index. In fact, a wide variety of index funds are listed in Hong Kong, tracking indices such as the FTSE China A50 Index, the Hang Seng Tech Index, and the Hang Seng China Enterprises Index, as well as international indices like the MSCI Japan and MSCI India indices.

Significantly lower fees

Index funds have gained popularity worldwide in recent years, largely due to their significantly lower fees compared to the more traditional actively managed funds. Since index funds merely track a specific index's performance, they eliminate the need for investment managers to conduct extensive research and analysis, resulting in lower costs. According to recent data from the MPFA, for equity funds investing in the Hong Kong market, the average fund expense ratio for passively managed index funds is 0.84%, whereas actively managed funds have an average fund expense ratio of 1.43%. For members who simply want their investment portfolio to perform in line with the market, index funds are an attractive option. However, for those aiming to outperform the market, actively managed funds may be a better choice.

Convenience of exchange-traded transactions

Another key feature of index funds is that they are traded on stock exchanges, just like stocks. Investors can buy and sell them at any time during market hours, with prices fluctuating in real time. Funds traded on exchanges are called Exchange-Traded Funds (ETFs), but not all ETFs are index funds. Due to their trading convenience, ETFs offer a simpler buying and selling process compared to traditional mutual funds, which has also attracted some non-index funds to be traded on exchanges.

ETFs challenge traditional mutual funds

For traditional mutual funds, the emergence of both index and non-index ETFs undoubtedly presents challenges. However, we believe that outstanding-performing traditional mutual funds will continue to attract investors' attention.