Passive Investing is Gaining Traction, Are Index Funds Communist?

Passive investing is gaining the attention of the media and investors, both large and small.

Passive Investing vs Active Investing

The black bar indicates the cash flow of new cash into or out of passively managed index mutual funds and Exchange Traded Funds. The tan colored line indicated such movements in or out of actively managed mutual funds and ETFs.


Actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons … Investors would greatly improve their odds of success by favoring low-cost funds, which succeeded far more often than high-cost funds over the long term.

– Ben Johnson, Morningstar’s director of global ETF research


More money is moving into these funds. As you can see from the chart above, much more money has been going into passive funds than active funds. According to Morningstar’s semiannual survey of active and passive investments, managers in 10 of the 11 equity categories it tracks did worse in 2016 compared with 2015, often by a double-digit degree.

When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.

– Warren Buffett

Warren Buffett has long been a proponent of passively managed index funds for most people. Not only does he think they are a better option for most of us, he was willing to put his money where his mouth was. He was willing to wager than the S&P 500 index fund would beat five hedge funds. Short of a catastrophe, after next year, he will have won his bet.

The Oracle of  Omaha thinks this is such a good way to invest, that’s how he plans to have his wife’s money invested this way after his demise.

A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management.

Passive investing is definitely the way to go for most people. It’s low cost, it outperforms 80% of actively managed funds, what can be wrong? Some suggest that index investing is communist. Well, here’s an almost entirely serious claim according to analysts at research and brokerage firm Sanford C. Bernstein & Co. where they suggest that index investing is worse than communism, and here’s a far less-than-serious take on this topic.

From Sanford Bernstein & Co.:

In a note titled “The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism,” a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry.

“A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management,” they write.

 

image credit: WSJJaneen

Add Comment