How the Active vs. Passive Debate Boosts ETFs

When considering where to invest, exchange traded funds (ETFs) or otherwise, what’s better: active or passive?

If active managers are under-performing the market, people think indexing would be the way to go, but if active managers outperform the market then those same people would probably say the reverse, remark Christopher Philips and Francis Kinniry Jr. for IndexUniverse.

In a given period, the performance of an active manager varies. It may be attributed to overall trends in the markets, or market cycles, and fund manager strategies, which varies in market capitalization, price/earnings and price/book ratios, and positioning.

During periods of elevated performance deviation in opposing market segments, like large- vs. small-caps or growth vs. value, there tends to be a greater distribution of returns in active management and a more distinct difference in performance relative to the market. When deviations are milder in the long term, fund styles have less of an impact and investors would look to costs.

Phillips and Kinniry looked at a variety of factors and technicals before determing that the overall effect was that active management under-performed when an index was performing well, and outperformed when an index was weak.