Specifically, Fama’s Efficient Markets Hypothesis, in conjunction with the Random Walk Theory, has helped propel passive investing. The Efficient Markets Hypothesis argues that it is impossible to “beat the market” since stocks always trade at fair value.
“These two theories gave a sucker punch to active managers who think they can outperform the market. … Because they attacked the basic foundations of the investing business, these ideas were slow to gain acceptance on Wall Street,” Lawrence Carrel said in “ETFs for the Long Run.”
Passively index-based ETFs, like the name suggests, are a group of investments that passively track an underlying index, leaving active management out of the equation. [Understanding ETF Portfolio Indexing]
For more information on ETF indices, visit our indexing category.
Max Chen contributed to this article.