Is the Rise of Passive Investing a Self-Fulfilling Prophesy?
A recent FT article suggests that the rise in popularity of passive index funds is driving a trend of increasing correlation in equities markets. That could mean diminishing returns for the traditional stock picking model. After a positive 2017 for active fund managers, almost half of US large-cap equity fund managers managed to beat their index last year, 2018 has seen a return to
For those investing online, this raises the question of whether it still makes sense to pay higher fees for actively managed funds or to put the time and effort into
Passive funds, or ETFs, that most commonly track equity indices or commodities have risen significantly in popularity with institutional investors as well as retail investors. They are a far cheaper way to diversify risk than actively managed funds and over
Periods of volatility and stock market drops are theoretically when active stock picking and fund managers should come into their own. ‘
However, there is also a strong argument that the current trend towards strong correlation within indexes will prove to be cyclical in the long run. If the value of stocks rise and fall because of the index they are in and not intrinsic merit, this would be expected to distort value over time.
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