What are index funds?

Index funds are passively managed equity funds that track a certain benchmark index. The funds’ buy and sell transactions are triggered automatically based on developments in the benchmark index.

How do index funds work?

An index fund will only trade when its benchmark index is updated to reflect the situation in the markets. This might happen two or four times a year, for example. Because of this, an index fund doesn’t require the investor to be very active.

Index funds are also known as passively managed funds because they aim to keep their portfolio allocation as close to their benchmark index as possible, and their portfolio managers don’t have to conduct a market analysis or apply their view of the market.

Passive funds often have lower fees

As a rule, funds that seek returns exceeding the market average through stock and sector picking require more work and analysis than funds that passively track an index. For this reason, index funds often have lower fees than actively managed funds.

The name “passive fund” is slightly misleading, however, as all fund management involves a certain measure of active decision-making. Even an index fund requires its manager to take a view on such aspects as the criteria for tracking the average performance of the market and the actual composition of the index.

In addition to index funds, the name “passive fund” may also refer to exchange-traded funds or ETFs. You can read more about ETFs here.

Pros of passive funds

• Cost efficiency. The management fees of passive funds are usually lower than those of actively managed funds.

• One clear advantage of index funds is that they are well-diversified compared to direct equity investments.

• Investors can influence the asset class and country allocation of their investments. Passive funds are suitable for investors who have the skills, time and interest to manage their personal investments. Unlike active funds, which offer a turnkey solution, passive funds require investors to spend some time on and show interest in managing their investments.

• No portfolio manager risk. The portfolio manager doesn’t influence investment decisions because the fund tracks its benchmark index.

Cons of passive funds

• Index investing requires a certain amount of effort because the investor must choose their preferred funds and update their personal portfolio regularly. In a balanced fund, the investor gets everything in one easy package.

• You can’t outperform the index. With a passive fund, all you can expect is the average market return, also called index return, minus the fund’s fees. This means that your return will always be slightly lower than that of the benchmark index. An active fund, on the other hand, seeks to outperform its benchmark index and provide a higher return than the index.

• Index funds are passive shareholders that don’t punish the managements of companies for making errors, which means the funds’ sustainability rating is not very high. In active funds, however, sustainability aspects are an integral part of risk management to reach the objective of better returns in the long term.

Index funds offered by Nordea

  • The selection of index funds we offer includes a fund that invests in global equities (Global Passive Fund), a fund that invests in European equities (European Passive Fund) and a Finnish index fund (Finnish Passive Fund). 
  • Additionally, we offer Enhance funds, which include global, European, US and emerging market funds. The Enhance funds fall in between active and passive funds – they are affordable and their portfolio manager makes fewer investment decisions than the managers of actively managed funds. The Enhance funds, however, aim to outperform their benchmark index, unlike completely passive funds. Further information on the funds is available in the Funds Now service.
  • The funds offered by our digital savings adviser Nora are affordable and represent semi-passive Enhance funds. Nora also offers monthly saving alternatives.
  • You can start saving in funds with as little as 10 euros. Simply conclude a fund savings agreement in Netbank or Nordea Mobile and save in funds every month without having to pay subscription or trading fees.
  • Monthly saving is an effortless way to grow your savings, while benefitting from the effect of compounding.
  • Please note that when you want to buy or sell units in a fund, you will do so at the fund’s net asset value, which is determined once per trading day, based on the official closing price. This means that if you make a trade in the afternoon after the fund’s cut-off time, the trade will be executed at the closing price of the next day. If you sell your units in Nordea funds, you will usually receive the money from the sale in your account after 2–3 days.

How do I start investing in index funds?

All good investment decisions are based on an investment plan.

  • Starting to invest in index funds doesn’t differ in any way from starting to invest in any other assets. First, you should prepare an investment plan. This involves thinking about what kind of return you are seeking, how long you plan to stay invested and how much risk you are willing to tolerate. 
  • Over the long term regular saving each month will provide good time diversification. You can start saving monthly in index funds through Nordea Mobile or Netbank if you have an account with Nordea. 
  • You can also check your investment profile with Nora, our digital savings adviser, or by booking an appointment with us. The funds offered by our digital savings adviser Nora are affordable and represent semi-passive Enhance funds. Nora also offers monthly saving alternatives.

Important information about investing

The information provided on this website is intended for general product information only and does not constitute investment advice or recommendations. When it comes to funds or equities, past performance is not a guarantee of future results. The value of fund units or equities may increase or decrease due to market movements, and it is not certain that you will get back the entire amount you invested.

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