Passive Vs Active

Question 1

Benefits of tracker (5)

Answer 1

• lower charges
• simple to understand
• reduced volatility
• may match ATR
• may outperform active managed fund
• less admin
• diversification is possible by tracking a number of indices
• most possible don’t produce an income so good for capital preservation

Question 2

Drawbacks of a tracker

Answer 2

• FTSE 100 is dominated by a small number of large businesses
• doesn’t produce a dividend so not good if wanting income
• will always underperform index due to charges
• no ability for fund manager to concentrate on favoured investments
• fund manager can not make a defensive stance when markets are expected to fall.
• manager must invest in line with index
• indices can be very concentrated so portfolios can lack diversification
• less growth potential than active funds