The analyst’s findings show that actively managed funds have generated most of their returns through low-volatile, beta investments. Consequently, most high-risk picks that are intended to generate alpha leave little or no effect on the overall performance of the fund portfolios.
Additionally, Rawson points out that the 99% R-squared for passive funds reveals that most of the movement in passive funds can be explained by the underlying indexing methodology. R-squared is a statistical measure that represents the percentage of a fund or security’s movements relative to a benchmark index – a 100 reading shows that a security perfectly reflects the underlying index. The analyst hints that some active funds may be closet index funds due to their low tracking errors, compared to benchmark indices.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.