Why do passive ETFs require so much trading (and incur costs)?
Now, if I'm not mistaken, tracking a value-weighted index is extremely easy - just buy the shares in the exact amount they are in the index and wait. Yes in theory. In practise this is difficult. Most funds that track S&P do it on sample basis. This is to maintain the fund size. Although I don't have / know the exact number ... if one wants to replicate the 500 stocks in the same %, one would need close to billion in fund size. As funds are not this large, there are various strategies adopted, including sampling of companies [i.e. don't buy all]; select a set of companies that mimic the S&P behaviour, etc. All these strategies result in tracking errors. There are algorithms to reduce this. The only time you would need to rebalance your holdings is when there is a change in the index, i.e. a company is dropped and a new one is added, right? So essentially rebalance is done to; If so, why do passive ETFs require frequent rebalancing and generally lose to their benchmark index? lets take an Index with just 3 companies, with below price. The total Market cap is 1000  The Minimum required to mimic this index is 200 or Multiples of 200. If so you are fine.    More Often, funds can't be this large. For example approx 100 funds track the S&P Index. Together they hold around 8-10% of Market Cap. Few large funds like Vangaurd, etc may hold around 2%. But most of the 100+ S&P funds hold something in 0.1 to 0.5 range. So lets say a fund only has 100. To maintain same proportion it has to buy shares in fraction. But it can only buy shares in whole numbers. This would then force the fund manager to allocate out of proportion, some may remain cash, etc. As you can see below illustrative, there is a tracking error. The fund is not truly able to mimic the index.  Now lets say after 1st April, the share price moved, now this would mean more tracking error if no action is taken [block 2] ... and less tracking error if one share of company B is sold and one share of company C is purchased.  Again the above is a very simplified view. Tracking error computation is involved mathematics.  Now that we have the basic concepts, more often funds tracking S&P; Thus they need to rebalance.
"A great deal of analysis on this question relies on misunderstandings of the market or noticing trends that happened at the same time but were not caused by each other.  Without knowing your view, I'll just give the basic idea. The amount of active management is self-correcting.  The reason people have moved out of actively managed funds is that the funds have not been performing well.  Their objective is to beat their benchmarks by profiting as they correct mispricing.  They are performing poorly because there is too much money chasing too few mispricings.  That is why the actively managed industry is shrinking.  If it gets small enough, presumably those opportunities will become more abundant and mispricing correction will become more profitable.  Then money will flow back into active funds. Relevant active management may not be what a lay person is thinking of.  At the retail level, we are observing a shift to passive funds, but there is still plenty of money in other places.  For example, pension and endowment funds normally have an objective of beating a market benchmark like the Russell 3000.  As a result they are constantly trying to find opportunities to invest in active management that really can outperform.  They represent a great deal of money and are nothing like the ""buy and forget"" stereotype we sometimes imagine.  Moreover, hedge funds and propreitary trading shops explicitly and solely try to correct mispricings.  They represent a very, very large bucket of money that is not shrinking.  Active retail mutual funds and individual investors are not as relevant for pricing as we might think.  More trading volume is not necessarily a good thing, nor is it the measure of market quality.  One argument against passive funds is that passive funds don't trade much.  Yet the volume of trading in the markets has risen dramatically over time as a result of technological improvements (algorithmic traders, mostly).  They have out-competed certain market makers who used to make money on inefficiencies of the market.  Is this a good thing or a bad thing?  Well, prices are more efficient now and it appears that these computers are more responsive to price-relevant information than people used to be.  So even if trading volume does decrease, I see no reason to worry that prices will become less efficient.  That's not the direction things have gone, even as passive investing has boomed. Overall, worries about passive investing rely on an assumption that there is not enough interest in and resources for making arbitrage profits to keep prices efficient.  This is highly counterfactual and always will be.  As long as people and institutions want money and have access to the markets, there will be plenty of resources allocated to price correction." "Typical Human Advisor: Advantages: They can recommend funds and allocations that fit to your portfolio. Disadvantages: Those who are just fund salespeople in disguise will usually recommend poor-performing funds for higher commission pay. Their advice will not be much different from random person internet advice. When your portfolio drops, they still get paid, and they don't care because they are not a fiduciary. Robo-Advisor: Advantages: Rules are automated, and typically based on crunched numbers. Somebody else executes the trades, and remembers to rebalance your portfolio when you'd usually forget to. Disadvantages: Not always accurate, usually relies on momentum from popularity. No one at the helm to adjust for risk. If you follow, you'll usually just lag behind. Yet, those with simple, low-cost diversified ETF portfolios can be attractive. Market ETFs: Advantages: Low cost funds that typically match the market. High performance. Easy to sell when you need to, zero decision making required, and you will be sure to nearly match the general market. Disadvantages: Boring. You need to enter your own orders, but you won't be doing that too often. No thrill except counting all the commas in your account. No wacky stories to wow your friends and family about your gambling addiction. Seriously, some people just can't help but take the high risk route. Newsletter / Portfolio / Online ""Expert"": Advantages: They usually have some idea of what indicators to look for and can make predictions about price movements. Disadvantages: Predictions are as frequently wrong as they are right. Good ones won't have much to say, and incompetent ones will write multi-paragraph essays about Fibonacci sequences, resistance levels, trends RSI, ROIT, everything that might show an indicator in some direction maybe... and it's usually forgotten by the next newsletter." "According to what little information is available currently, this fund is most akin to an actively managed exchange traded fund rather than an investment trust. An investment trust is an actively managed, closed-end fund that is tradeable on the stock market.  ""Closed-end"" means that there are a fixed number of shares available for trading, so if you wish to buy or sell shares in a closed-end fund you need to find someone willing to sell or buy shares.  ""Actively managed"" means that the assets are selected by the fund managers in the belief that they will perform well.  This is in contrast to a ""passively managed"" fund which simply tracks an underlying index.   The closed-end nature of investment trusts means that the share price is not well correlated to the value of the underlying assets.  Indeed, almost all UK investment trusts trade at a significant discount to their net asset value.  This reflects their historic poor performance and relatively weak liquidity.  Of course there are some exceptions to this. Examples of open-end funds are unit trust (US = mutual funds) and ETFs (exchange traded funds).  They are ""open-end"" funds in the sense that the number of shares/units available will change according to demand.  Most importantly, the price of a share/unit will be strongly correlated to the net asset value of the underlying portfolio.  In general, for an open-end fund, if the net asset value of the fund is X and there are Y shares/units outstanding, then the price of a share/unit will be X/Y.  Historic data shows that passively managed funds (index trackers) ""always"" outperform actively managed funds in the long term.  One of the big issues with actively managed funds is they have relatively high management fees.  The Peoples Trust will be charging about 1% with a promise that this should come down over time.  Compare this to a fee of 0.05% on a large, major market index tracking ETF.  Further, the 1% headline fee being touted by Peoples Trust is a somewhat misleading, since they are paying their employees bonuses with shares in the fund.  This will cause dilution of the net asset value per share and can be read as addition management fees by proxy.  Since competent fund managers will demand high incomes, bonus shares could easily double the management fees, depending on the size of the fund. In summary, history has shown that the promises of active fund managers rarely (if ever) come to fruition. Personally, I would not consider this to be an attractive investment and would look more towards a passively managed major market index ETF with low management fees." I would agree with the other answers about it being a bad idea to invest in stocks in the short term. However, do consider also long-term repairs. For example, you should be prepared to a repair happening in 20 years in addition to repairs happening in a couple of months. So, if it is at all possible for you to save a bit more, put 2% of the construction cost of a typical new house (just a house, not the land the house is standing on) aside every year into a long-term repair fund and invest it into stocks. I would recommend a low-cost index fund or passive ETF instead of manually picking stocks. When you have a long-term repair that requires large amounts of money but will be good for decades to come, you will take some money out of the long-term repair fund. Where I live, houses cost about 4000 EUR per square meter, but most of that is the land and building permit cost. The actual construction cost is about 2500 EUR per square meter. So, I would put away 50 EUR per square meter every year. So, for example, for a relatively small 50 square meter apartment, that would mean 2500 EUR per year. There are quite many repairs that are long-term repairs. For example, in apartment buildings, plumbing needs to be redone every 40 years or so. Given such a long time period, it makes sense to invest the money into stocks. So, my recommendation would be to have two repair funds: short-term repairs and long-term repairs. Only the long-term repair fund should be invested into stocks. In my experience they charge you coming and going. For example, if a brokerage firm is advertising that their commissions are only $7/trade, then that means you pay money to buy the stock, plus $7 to them, and later on if you want to sell that stock you must pay $7 to get out of the deal.  So, if you want to make any money on a stock (say, priced at $10) you would have to sell it at a price above $10+$7+$7=$24. That kind of sale could take a few years to turn a profit. However, with flat-rate fees like that it is advantageous to buy in bulk. "There was a time when everyone felt their goal was to beat the respective index they followed. But of course, in aggregate, that's a mathematical impossibility. The result was that the average say large cap fund, whose benchmark index would be the S&P, would lag on average by 1-2%.  A trend toward ETFs that would match the market had begun, and the current ETFs that follow the S&P are sub .1% expense.  For the fact that studies (Google ""Dalbar"" for examples) show the typical investor lags not by 1% or 2%, but by far more for reasons of bad timing, my own statement that ""I've gotten a return these past years of .06% less than the S&P"" would have been seen many years ago as failure, now it's bragging. It handily beats the typical investor and yet, can be had by anyone wishing to stay the course, keep the ETF very long term." I think by definition there aren't, generally speaking, any indicators (as in chart indicators, I assume you mean)  for fundamental analysis. Off the top of my head I can't think of one chart indicator that I wouldn't call 'technical', even though a couple could possibly go either way and I'm sure someone will help prove me wrong. But the point I want to make is that to do fundamental analysis, it is most certainly more time consuming. Depending on what instrument you're investing in, you need to have a micro perspective (company specific details) and a macro perspective (about the industry it's in). If you're investing in sector ETFs or the like, you'd be more reliant on the macro analysis. If you're investing in commodities, you'll need to consider macro analysis in multiple countries who are big producers/consumers of the item. There's no cut and dried way to do it, however I personally opt for a macro analysis of sector ETFs and then use technical analysis to determine my entry and/or exit. The creation mechanism for ETF's ensures that the value of the underlying stocks do not diverge significantly from the Fund's value.  Authorized participants have a strong incentive to arbitrage any pricing differences and create/redeem blocks of stock/etf until the prices are back inline.  Contrary to what was stated in a previous answer, this mechanism lowers the cost of management of ETF's when compared to mutual funds that must access the market on a regular basis when any investors enter/exit the fund. The ETF only needs to create/redeem in a wholesale basis, this allows them to operate with management fees that are much lower than those of a mutual fund.  Expenses Due to the passive nature of indexed strategies, the internal   expenses of most ETFs are considerably lower than those of many mutual   funds. Of the more than 900 available ETFs listed on Morningstar in   2010, those with the lowest expense ratios charged about .10%, while   those with the highest expenses ran about 1.25%. By comparison, the   lowest fund fees range from .01% to more than 10% per year for other   funds. (For more on mutual fund feeds, read Stop Paying High Fees.)