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ETFs and passive investing are taking over the ASX

There has been an undeniable rise of passive investing compared to active investing. This is mainly a rise due to investing in index funds which provide a simple, transparent, low-cost way to invest in a lot of shares at once. It provides good diversification.

A big change has been the accessibility of index funds through a shift to exchange-traded funds (ETF) where you can buy through a stock exchange like the ASX. One of the largest providers of ETFs in Australia and indeed around the world is Vanguard.

I’m sure you’ve heard of ETFs like Vanguard Australian Share ETF (ASX: VAS), Vanguard MSCI Index International Shares ETF (ASX: VGS), Vanguard All-World ex-U.S. Shares Index ETF (ASX: VEU) and Vanguard US Total Market Shares Index ETF (ASX: VTS).

Vanguard’s scale is becoming more apparent after National Australia Bank Ltd (ASX: NAB) just announced that the bank became aware that Vanguard Group and associated entities became a substantial company holding around 136.7 million shares, representing 5% of the voting power of NAB.

This stake is worth over $3.8 billion, so Vanguard is becoming a major player in Australia now.

Is this a good thing?

Vanguard is ‘bringing’ the share market to people who would previously have found it difficult to invest in the market and generate good performance – a lot of investors actually underperform the index over the long-term.

It’s also done at a very low cost. Fees can be the biggest detractor from long-term wealth creation for the regular person, as the Royal Commission is showing.

However, passive investing may not be good in a market downturn. It’s easy to be a passive investor when the share market is going up each year. However, when the next recession hits a lot of people may decide to ‘sell low’ and pull their money out of the share market.

For most regular investors I think ETFs can form a good part, or all, of the investment strategy. I just hope that as Vanguard gains more voting power it will punish businesses that don’t do right by shareholders and society.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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