STREET DOGS

From Pragmatic

Capitalism: Among the more confused terms is the “active” vs “passive” taxonomy, which has resulted in substantial confusion among experts and amateur investors.

In today’s diverse world of index funds you are no longer tracking passive indices since you can now track almost anything in the world ranging from hedge funds … to plain vanilla market cap weighted index funds.

Passive investing is not just about reduced activity, low fees and tax efficiency. A stock picker who picks one stock and buys and holds it can be just as inactive as someone who buys one index and holds it.

As Rick Ferri, a notable expert when it comes to indexing, says: “There’s no such thing as passive investing. Passive investing in its purest form doesn’t exist. Only lesser degrees of active management exist … any index must be continuously maintained by real people who face difficult issues when trying to track an index … when to trade, what to trade, what to do with new cash, whether to use futures or other derivatives, etc.

“There’s nothing passive about managing an index fund.”

The correct differentiating aspect between active and passive investing is that an active investor tries to “beat the market” on a risk-adjusted basis while a passive investor tries to “take the market return”.

But an indexer who owns the S&P 500 owns just 18% of the world’s financial assets. This makes the indexer no different from the buy-and-hold stock picker who owns a slice of the S&P 500.

The rise of index funds has turned us all into “asset pickers” instead of stock pickers, yet the “passive” indexing community has tried to sell indexing as though it’s something totally different.