Influence of the growing ETF industry on active investor relations work18 Fundamentals of passive investments and ETFs 2 Fundamentals of passive investments and ETFs 2 1 Definition of active and passive investment in financial markets In this chapter active and passive investment is firstly defined followed by a description of the key characteristics of funds Finally different product types of passive investments are briefly presented The broad range of financial products and invest ment opportunities offers options for investing and managing assets for every type of investment preference In addition to the classic investment in shares other financial instruments traded on markets include securities like bonds certificates warrants funds and derivatives among others The distinction between active and passive investments is not a strict line but rather vague Depending on how active and passive investment is defined some investment types and financial instruments e g funds can either be counted into one or the other category One investment strategy does not automatically exclude the other On the contrary both strategies can complement each other Blackrock 2021 Active and passive investments differ mainly in their main objectives and applied strategies The overall aim of active management of investments is to outperform the market and as a result to achieve a higher return on the investment than the market average Blackrock 2021 Investment strategies such as active stock picking or market timing are used to try to beat the market aver age Riedl 2015 Active investments are based on individual assessments where investment opportunities are first being analyzed on how to outperform the market and then evaluated before an active decision is being made As a deep understanding and expertise is necessary to spot the best investment opportunities highly skilled and experienced managers researchers and ana lysts make those decisions backed by databases Blackrock 2021 In contrast to active investment instruments pas sive management of investments like funds with a passive investment strategy generally pursue the goal of tracking the development of an index or an underlying asset e g gold as closely as possible Krautbauer 2015 p 77 The aim is not to outper form the benchmark but to achieve stable long term returns Decisions are not made as it is the case with active investments by humans but are rather automated technology based processes which can be performed by computers Blackrock 2021 Passive forms of investment pursue a long term buy and hold strategy and dispense with short term speculative investments and ongoing trading as making profit from market fluctua tions is not the objective Kommer 2018 p 219 It should be mentioned at this point that only about 10 of actively managed funds succeed in beating the market For example the MSCI World is only outperformed every 10 years leading to a low probability of achieving high returns by outperfor mance Heinrich Jänner 2018 pp 384 2 1 1 Description of funds From a legal perspective funds are considered special assets have an unlimited maturity and are offered by capital management companies Kraut bauer 2015 p 86 Besides Blackrock Vanguard and State Street are the largest fund managers with AUM of US 19tn making up around 10 of quoted securities globally FT 2021 Funds fol lowing a passive investment strategy can be fur ther subdivided into ETFs classic index funds and passive special funds Krautbauer 2015 p 781 Distinctions are made between open and closed end funds public and special funds and different fund strategies such as equity funds bond funds mixed funds or real estate funds Zinnecker 2020 Although both index funds and ETFs track an under lying index the two investment products differ in terms of trading While the price of an index fund is only determined once a day the price of an ETF is available to investors at any time making intra day trading therefore possible ExtraETF 2021

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