The benefits of active versus passive management has been a longstanding question in asset management. The debate has gained momentum in recent years as only a few managers in certain asset classes have been able to outperform index-replicating strategies on a net basis. To gain from passive management, however, it helps for an asset class to have three characteristics:
- The index must be able to be replicated.
- In the case of ETFs, any disconnect between the price of the passive vehicle and the market value of an actual basket of securities should be able to be easily arbitraged.
- Fees on the passive vehicle should be low. Ultimately, the fee is the guaranteed underperformance of the passive vehicle compared to the benchmark.