ETFs are best for passive investing

April 4, 2020

If you want to invest but are not sure about how to pick stocks, passive investing may be for you. But what are your options to invest passively? Read on to find out more.

Active vs. Passive Investing

In the investing world, a common distinction is made between active investing and passive investing. Simply put, active investing seeks to beat the market (by capturing ‘alpha’) while passive investing seeks to follow the market (by buying market ‘beta’).

Crea8 offers:

  • Active investing using Factor based investing; and
  • Passive investing using Goal based investing.

Why not try and beat the market?

Several studies have concluded that most traditional fund managers (i.e those who try and beat the market) cannot provide consistent active returns for several reasons. Some of the reasons are a lack of skill (Jensen, 1969) and that active management leads to greater taxation (Arnott & Jeffrey, 1993). As such, they cannot justify the fees that they charge.

Crea8 overcomes this by offering Factor based investing at only 17% of the fees paid to traditional fund managers.

If you can’t beat them, own them

Because of the underperformance of active fund managers or the lack of consistent outperformance, investors have resorted to owning the market by buying index funds instead of trying to beat the market.

In August 2019, data from Morningstar showed that there were more passive investors than active investors – assets in index-tracking U.S. equity funds are $4.27 trillion vs. $4.25 trillion run by stock-pickers.

Securities for passive investing

There are a few vehicles that can be used for passive investments:

  • Unit trusts: A type of collective investment that allows investors with similar investment objectives to pool their funds and invest in a portfolio of securities or other assets. A small number of unit trusts track the market indices.
  • Index funds: A mutual fund built to match the performance of a market index, such as the S&P 500 or Russell 1000 Index
  • Exchange Traded Funds (ETFs): Investment securities that are similar to index funds but are traded on exchanges like stocks.

Being low cost, diversified and exchange traded, ETFs are the preferred vehicle

ETFs have been the instrument of choice for many investors. It took nearly 20 years for the first ETF (launched in 1993) to reach $1 trn in assets. However, going from $3trn to $4trn took only 2 years (2017 to 2019).

There are several reasons why ETFs are preferred:

  • Diversification: Investors can gain access to hundreds of stocks or bonds through one ETF. Such diversification reduces volatility.
  • Low cost: Expense ratios for ETFs are lower than for index funds or unit trusts. Index funds and unit trusts have operational costs associated with them, which ETFs do not incur.
  • Exchange traded: Like stocks, ETFs trade on exchanges. This means that investors can place market orders, such as stop-loss orders and limit orders to automatically sell their ETF when it reaches a certain price either to cut loss or to take profits.

Crea8’s Goal based investing recommends ETFs

Crea8’s Goal based investing service provides you with a cost-efficient avenue to realise your financial goals sooner than investing using unit trusts. Besides, Crea8 provides you with personalised and optimised investment portfolios.

Our universe includes up to 350 ETFs across various asset classes and geographies

The wide range of ETFs in our investment universe gives assurance that the investment plans we provide you are diverse and capable of withstanding market stress and consistent with the theme.

Crea8’s Advice

Investors today have access to various instruments to invest passively. Despite this, we believe that ETFs offer the best option for investors looking for passive investment exposure.

Tips for your journey

If you want to know more about ETFs, check out this article that takes an inside look at ETFs.

If you want to learn more

For further insight including how we make use of ETFs for our investment services, check out our white papers.


Jensen, M., ‘Risk, The Pricing of Capital Assets, and the Evaluation of Investment Portfolios’, The Journal of Business, 1969, vol. 42, issue 2, pp 167-247 https://econpapers.repec.org/article/ucpjnlbus/v_3a42_3ay_3a1969_3ai_3a2_3ap_3a167-247.htm

Arnott, R.D. and Jeffrey, R.H., ‘Is Your Alpha Big Enough To Cover Its Taxes?’, Journal of Portfolio Management, Vol. 2, 1993, pp 1-14 https://www.evidenceinvestor.com/evidence/is-your-alpha-big-enough-to-cover-its-taxes/is-your-alpha-big-enough-to-cover-its-taxes-robert-h-jeffrey-robert-d-arnott-spring-1993/

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