Many experts say passives are best used in areas of the market that are overly researched – such as the US – where it is difficult to find active managers who can add enough value to justify their higher charges.
The same could be said for high-growth areas, such as emerging markets, where simple exposure to the underlying index can sometimes be all that is required to make strong gains.
However, investors should be aware that this method also leaves them exposed to sharper falls.
FE Trustnet asked three industry experts to name the passive emerging markets funds they would recommend to investors to help them cut costs.
Here are their choices:
Vanguard FTSE Emerging Markets – TER 0.45 per cent
Rob Gleeson, head of FE Research, says that the Vanguard FTSE Emerging Markets tracker is the best option available to retail investors.
"The reason for that is because they are very cheap but they have a very strong replication strategy, which means they still do very well even though they don’t cost much," he said.
The Vanguard FTSE Emerging Markets Index was launched in May last year.
Performance of fund vs index since launch
Source: FE Analytics
Over that time it has made 18.04 per cent as the FTSE Emerging index has made 18.3 per cent, according to data from FE Analytics.
BlackRock CIF Emerging Markets Equity Tracker – OCF 0.62 per cent
Gavin Haynes, managing director at Whitechurch Securities, says he uses emerging markets trackers for the firm’s discretionary portfolios.
"One of the passive funds we use in our portfolios for broader exposure is BlackRock CIF Emerging Markets Equity Tracker."
"It has a total expense ratio of 0.62 per cent, which, due to the cost of trading in the emerging markets, is slightly higher than their developed market funds."
The £364.3m Blackrock CIF Emerging Markets Equity Tracker was launched in November 2009. Since then the fund – which tracks the FTSE All World Emerging Index – has had a tracking error of 2.99 per cent.
Performance of fund vs index since Nov 2009
Source: FE Analytics
It has returned 19.1 per cent to its investors over this time, while the index has returned 14.9 per cent.
HSBC Pacific Index – TER 0.37 per cent
Haynes says that HSBC Pacific Index is a good choice for investors who want a more focused play on emerging markets.
"For a more region-specific emerging market fund, specifically the Far East ex Japan, we use HSBC Pacific Index. It has a good long-term record and has a TER of 0.37 per cent."
Investors who bought the £157m HSBC Pacific Index 10 years ago would have seen returns of 275.88 per cent.
Performance of fund vs index over 10yrs
Source: FE Analytics
The fund holds 26.25 per cent in Australian Equities, 19.96 per cent in Cantonese equities and 15.37 per cent in companies listed in Taiwan.
iShares MSCI Emerging Markets Index – TER 0.74 per cent
Adam Laird, passive investment manager at Hargreaves Lansdown, says he would never recommend pushing investors into a single-country tracker. Instead he prefers a broader approach to emerging markets.
Laird says that while ETFs and trackers can be a good way to gain access to an individual country, if the market goes south, investors are tied to the individual stocks in an underdeveloped and often volatile market.
Active managers, on the other hand, would be able to shift their asset allocation to smooth bumps in the market cycle.
"One of the most popular passive funds with our clients is the iShares MSCI Emerging Markets Index fund. It has been very popular because it gives you broad diversification and has a TER of just 0.74 per cent," he said.
iShares MSCI Emerging Markets Index was launched in April 2003 and currently has $3.7bn in assets under management.
According to FE Analytics, over five years the ETF has returned 41.86 per cent while the MSCI Emerging Market Index has returned 42.29 per cent.
Performance of fund vs index over 5yrs
Source: FE Analytics
The fund’s largest weighting is to China – making up 16.68 per cent – but it also gives investors high levels of exposure to South Korean, Brazilian and Taiwanese equity markets.
iShares MSCI Emerging Markets’ top-10 holdings include Samsung, Taiwan Semiconductor and Petrobras.
DB X-Trackers S&P Select Frontier ETF – TER 0.95 per cent
Laird says investors who want to take a higher degree of risk could look to frontier markets with DB X-Tracker S&P Select Frontier ETF.
"If investors wanted to go for it and have exposure [to frontier markets], then a fund we use is the DB X-Trackers S&P Select Frontier. It is slightly more expensive though, with a TER of 0.95 per cent," he said.
"They charge the higher rate because of the scarcity of companies available and the difficulty of gaining access to them."
"The fund only tracks a small number of stocks – around 30 – which are basically the most liquid available across the regions."
The DB X-Trackers S&P Select Frontier ETF offers access to equity markets in areas such as the United Arab Emirates, Kuwait, Argentina, Qatar and Nigeria.
Due to the crash in 2008, the fund is down 39.32 per cent since its launch. However, over one year it has returned 5.98 per cent.