Passive investing with index (or tracker) funds is one of the simplest ways to invest in the stock market.
Over 10% of our clients’ investments are held in index funds.
But what if your investment goals are focused on receiving an income? Is passive investing the right choice, or can actively-managed funds add value?
This article looks at both approaches, but it isn’t personal advice. If you’re not sure an investment is right for you, you should ask us for financial advice. Investments, and any income from them, will go up and down, so you could get back less than you invest.
Information correct as at 30 September.
Passive investing – what you need to know about investing for income
Passive investing is where you invest in a fund which aims to replicate a market or index. It can be a good approach to create wealth over the long term.
By investing in a passive fund that tracks a stock index, you’re getting a positive bias, by design, to the stocks that are going up the most.
This means you can end up investing more and more in the best-performing companies over time, without needing to do anything.
You can often also do this for a lower cost, because passive funds tend to be cheaper than active ones.
This investing approach doesn’t work for every type of equity market or style of investing, particularly when it comes to income investing.
For example, you might look to invest passively in US equity income by buying a fund that tracks the S&P 500 Dividend Aristocrats index. This index is made up of those S&P 500 companies that have increased their dividends every year for the last 25 consecutive years.
This might sound like a sensible approach to equity income investing, until you discover that tracking this index means investing primarily in traditional, old-economy sectors like consumer staples and industrials.
Instead, it’s always best to invest across a range of sectors to help spread your risk.
Then there’s the issue that by restricting companies to only those that have paid 25 years of consecutive dividends, you’re leaving out some of the biggest companies in the stock market today.
For example:
Microsoft didn’t declare its first dividend until January 2003.
Apple re-instated its dividend in 2012 after 17-year period of no dividends.
Google didn’t publicly list its shares until August 2004 and waited until June 2024 before paying a dividend.
Facebook wasn’t founded until 2004, didn’t list its shares until May 2012 and didn’t pay a dividend until March 2024.
To limit your investment universe like this could have a detrimental impact on investment performance, and shows how important it is to have a diversified portfolio.
Active investing – what you need to know about investing for income
Active investing means fund managers make active decisions over what to invest in. They can change their holdings depending on what they believe has the best performance potential and therefore aim to outperform passive investments – of course this is never guaranteed.
We believe it’s important to take an actively-managed approach to equity income investing.
Active income investing is the only way you can build a portfolio that’s able to adapt to a changing investment environment. An active approach allows us to consider not just the level of income today, but also the growth and sustainability of that income over time.
Diversifying income sources is also important.
An active approach to income investing should be global in nature. This way it lets us invest in some of the biggest, and potentially the best, companies around the world.
You can see benefits of this active approach to equity income investing when you compare the performance of IA Global Equity Income peer group to an ETF that tracks the FTSE All World High Dividend Yield Index. This is an index of the highest-yielding stocks globally but it does not make consideration for the sustainability or growth of income.
Over the last 10 years, the IA Global Equity Income peer group has returned (in GBP) net of fees 134.13%, versus 125.38% for the passive ETF.
Annual total return over past five years
September 2019- September 2020 | September 2020- September 2021 | September 2021- September 2022 | September 2022– September 2023 | September 2023– September 2024 | |
|---|---|---|---|---|---|
IA Global Equity Income peer group | -3.79% | 21.84% | -0.47% | 9.38% | 15.06% |
Vanguard FTSE All World High Dividend Yield ETF | -11.55% | 24.49% | 4.16% | 8.40% | 13.60% |
Looking to invest for income? – 3 actively-managed fund ideas
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
New – HL Global Equity Income Fund
The NEW HL Global Equity Income Fund is an actively-managed fund that looks to give investors a monthly, globally diversified income, and potentially grow that income over time.
It’s run by HL’s expert fund management team, with the help of who they believe are some of the best global equity income stock pickers in the market right now.
The team have blended the investment styles of these external managers for a well-rounded approach.
HL Income Fund
The HL Income Fund invests in a mix of bonds and shares.
The fund aims for growth over the long term, while paying investors a monthly income.
The fund is an all-in-one, globally diversified portfolio, managed by HL’s expert fund management team.
This means you can hold it on its own and have a fully diversified investment portfolio. Or, you can add it to an existing portfolio.
HL High Income Fund
The HL High Income Fund also invests in a mix of bonds and shares from across the world.
Investors can leave the asset allocation and fund manager selection to HL’s expert fund management team.
It’s a great option if you’re looking to diversify a portfolio that’s focused on generating an income.
Investors can receive a monthly income with the potential for future income growth.
HL funds are managed by Hargreaves Lansdown Fund Managers Ltd., part of the Hargreaves Lansdown Group.