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Why Consider Active vs Passive Management in High Yield

Only a few managers in certain asset classes have been able to outperform index-replicating strategies on a net basis.

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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:

    1. The index must be able to be replicated.
    2. 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.
    3. Fees on the passive vehicle should be low. Ultimately, the fee is the guaranteed underperformance of the passive vehicle compared to the benchmark.

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