Why Public Pensions Invest in Index Funds
When people think about investing, they often imagine experts searching for the next big stock. While active investment strategies remain an important part of the WRS portfolios, another key tool is the passive index fund.
An index fund is designed to track the performance of a broad market benchmark, such as the U.S. stock market or international stock markets.
Rather than selecting a small number of companies, an index fund invests in hundreds or even thousands of businesses across many industries and regions.
For public pension systems like the WRS, index funds play an important role in diversification.
Diversification means spreading investments across many different assets instead of relying on the success of a few companies, industries, or countries.
By owning a broad slice of the market, index funds help reduce the impact that any single investment can have on the overall portfolio.
Broad market index strategies are widely recognized for providing diversification while keeping investment costs low.
“Diversification is often called the only free lunch in investing because it can reduce risk for a given expected long-term return,” said Todd Mattina, Head Economist and Asset & Risk Allocation Chief Investment Officer of SWIB.
“Broad-market index funds are one of the simplest and most cost-effective ways to capture those benefits.”
Index funds also help manage costs. Because they are designed to follow an established market index rather than rely on teams of analysts making individual investment decisions, they generally have lower operating expenses.
Over time, keeping costs low can help more of the portfolio’s investment returns stay in the fund, benefiting participants and taxpayers alike.
Another advantage is consistency. Markets can be unpredictable, and even skilled investors do not always outperform market benchmarks.
Index funds provide reliable exposure to the long-term growth of global economies and financial markets.
“No one can consistently predict which companies, industries, or countries will outperform over the next decade,” Mattina said.
“Broad market exposure helps ensure we're invested wherever economic growth occurs.”
Index funds are not a complete investment solution on their own. They are typically used alongside other investments, including actively managed strategies, private markets, real estate, and fixed income investments.
SWIB's investment approach combines both active and passive strategies as part of a diversified portfolio.
“Active and passive investing aren't competing philosophies, they're complementary tools,” Mattina said.
“Our responsibility is to combine them into a diversified portfolio that delivers strong long-term outcomes for Wisconsin's public employees and retirees,” added Mattina.
By combining diversified index funds with other investment approaches, SWIB can build resilient portfolios that support retirement security for current and future generations of public employees.
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