Are index funds always better than active funds?

Not always, but statistically most active funds do not beat their benchmark index after fees over the long term. That is a well-documented fact. But there are active managers with discipline and process who do deliver outperformance. The key is distinguishing those with a genuine method from those charging for no added value.

What is the difference between an index fund and an ETF?

An ETF (Exchange-Traded Fund) is a fund listed on a stock exchange and traded in real time like a share. Index funds can be ETFs, but ETFs can also be active. The difference is more about the trading structure than the management style.

How does Amos Value differ from an index fund?

Amos Value holds 25 to 35 carefully selected quality businesses bought with a margin of safety. An index fund holds all companies in an index regardless of quality or price. Amos Value can deviate significantly from the index, but only accepts risk that has been actively chosen.

Why do people choose active funds over index funds?

For several reasons. Some want exposure to specific strategies such as value or growth investing. Others want an accountable manager making active selections and avoiding companies that lack quality. And some are looking for outperformance against the index if the manager can deliver it.

Glossary

Index Fund

A fund that mechanically tracks a market index and holds all constituent companies proportionally. Low cost is the advantage. The absence of selection is the trade-off.

What it is

The market in full, not at its best

An index fund replicates the composition of a market index, such as the OMXS30 or MSCI World. The fund holds all companies in the index in proportion to their market capitalisation. There is no active analysis, no selection of quality businesses, and no consideration of valuation. The cost is low and management is almost entirely automated. That is both the index fund's strength and its limitation.

Low fee: Without active management or analysis, costs can be kept very low, sometimes below 0.1 per cent per year. That is a genuine advantage over active funds with a weak process.
Broad diversification: Index funds provide exposure to an entire market. That reduces the risk of individual companies dragging down returns dramatically.
No active decisions: The fund automatically buys all companies in the index regardless of whether they trade at excessive valuations or lack profitability. That is a functional feature, but also a limitation.

Active vs passive

Selection versus the whole market

An index fund can by definition never beat the index. It IS the index. An active fund like Amos Value owns companies because the manager believes in them, not because they happen to be in an index. The ambition is to hold thirty to forty carefully selected quality businesses with a margin of safety. That means taking conscious risks and making active choices, and accepting that the fund may underperform an index in the short term. That is the price of having a genuine conviction.

“We will miss next year's winners. But we will not own next year's biggest losers.”

Amos Fonder

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Common questions about index funds

Related concepts

Glossary

P/E Ratio

The share price divided by earnings per share. One of the most common valuation metrics, and also one of the most misunderstood.

CAGR

Compound Annual Growth Rate. The annual growth rate that would have taken a value from point A to point B, as if growth had been perfectly smooth every year.

DCF

Discounted Cash Flow. A valuation method that calculates what a company's future cash flows are worth today. The core principle: a unit of money tomorrow is worth less than a unit of money today.

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