What will happen to the market if everyone is passively invested? Why do markets need active managers?

Imagine a $1 trillion equity market consistently moving towards passive investing. It reaches the point where 90% ($900 billion) of the investments are passively managed and only 10% ($100 billion) are actively managed. Furthermore, one day, all the actively invested money is withdrawn and instead invested in passive funds. What will happen if everyone decided Read more about What will happen to the market if everyone is passively invested? Why do markets need active managers?[…]

What entails being a passive investor and why most are NOT.

The common perception is that if one invests in ETFs or indices like the S&P 500, one is being “passive”. The media have additionally confused the definition by considering any strategy that is rule-based or systematic as passive investing. This poor understanding has led many investors attempting to create a passive portfolio to end up Read more about What entails being a passive investor and why most are NOT.[…]

Why are active managers having a hard time outperforming? Why is alpha declining and disappearing?

We have all noticed that active investors such as mutual funds and hedge funds are struggling. It doesn’t even stop there. Famous investors like Warren Buffet and Charlie Munger are no longer generating remarkable excess returns. Nevertheless, there was a time in history when superstar managers created great wealth for their investors. So, how was Read more about Why are active managers having a hard time outperforming? Why is alpha declining and disappearing?[…]

How much alpha exists in the financial markets? Is alpha a zero sum game?

Ever wonder if generating alpha is a zero-sum game? Or do you think quotes like these below hold: “Active management can generate alpha for investors, and passive investing cannot.” “In a market with low returns, active management is better, as alpha becomes more important.” In this post we will establish how much alpha is available Read more about How much alpha exists in the financial markets? Is alpha a zero sum game?[…]

Why higher dispersion of returns or FED policy will NOT help active management outperform.

Research reports by active management firms often make the following claims: “The reason passive has been outperforming is that loose monetary policy has pushed all asset and security prices up, once the trend reverses active managers’ will outperform.” “Active managers will outperform once the dispersion of securities returns increases, as not all asset prices will Read more about Why higher dispersion of returns or FED policy will NOT help active management outperform.[…]

Best investment vehicle? Are NextShares ETMF better structure than ETFs and Mutual Funds.

ETFs vs. Mutual Fund vs. NextShares ETMF Ever wonder if there is an investment vehicle structure that takes the best of both ETFs and Mutual Funds? In February 2016, Eaton Vance did just that with the introduction of NextShares Exchange Traded Mutual Funds, for short ETMFs. The new structure is marketed for active portfolio managers Read more about Best investment vehicle? Are NextShares ETMF better structure than ETFs and Mutual Funds.[…]

The real disadvantages of open-end mutual funds compare to ETFs.

The open-end mutual fund structure has been around since the 18th century thanks to a Dutch merchant. Mutual funds were introduced to the United States in the 1890s, and they gained popularity in the 1920s. The modern mutual fund has forgone additional changes to satisfy regulation. Currently, around 85% of all retail assets are managed Read more about The real disadvantages of open-end mutual funds compare to ETFs.[…]

The hidden costs of ETFs and why you should not trade them frequently.

ETFs have gained enormous popularity in the US and for darn good reasons. These structures combined with the fast adoption of index investing have brought tremendous benefits to investors. One of the most familiar arguments to use ETFs is their lower cost. Are ETFs superior to mutual funds cost wise? The answer is “it depends”. Read more about The hidden costs of ETFs and why you should not trade them frequently.[…]

What is active share? And why it does NOT predict outperformance.

“Active share” is the percentage of a portfolio that differs from a benchmark index. This measurement is often used to determine the degree of active management. Unfortunately, there have been a few poorly thought out research studies suggesting that active share is predictive(positively correlated) with excess return. As usually the media quickly picked those up, Read more about What is active share? And why it does NOT predict outperformance.[…]

Do active managers outperform in down markets?

The short answer is no. One of the prime active manager’s pitches against passive investing is that they outperform in bear markets. The argument is that active managers can foresee downturns and position their portfolios accordingly, adding value through better selection into more defensive securities, compared to an index fund manager who must track the Read more about Do active managers outperform in down markets?[…]

How passive management growth makes the equity markets more efficient.

“Getting rid of the bad apples will make the apple pie taste better” A common argument against passive investing is that it will lead to less efficient markets and more mispricings, and in the process it will create more opportunities for active investors. Unfortunately for active managers, that argument is flawed—if not downright false. In Read more about How passive management growth makes the equity markets more efficient.[…]

Why passive investing outperforms active management and why it is impossible for active investors to outperform the market.

You can’t beat the average, if you are the average! Unfortunately, there are many people in the wealth management industry who do not understand that it’s impossible for active managers to outperform—as a whole. I believe the foremost reason is that most don’t understand how a market works. Folks forget the financial market is just Read more about Why passive investing outperforms active management and why it is impossible for active investors to outperform the market.[…]