The World Is Not Becoming Passive: It Is Becoming Active in a New and More Useful Way

By Lee Kranefuss, 55 Captial Partners via

A front-page article in The Wall Street Journal recently reported that $124 billion has poured into ETFs in fewer than 60 days. These ETF flows are the strongest start to a year ever. If this rate continues, ETFs will capture about three-quarters of a trillion dollars this year in the U.S.

ETFs keep growing fast because traditional security-selection active management frequently struggles to perform. We all know the story. First, traditional active is expensive. Second, over the long-run, few if any traditional active managers deliver enough performance to offset their cost. Third, the opportunity for success from picking stocks is getting smaller, in part due to the impacts of technology and capital market innovation. Fourth, because active managers tend to hug the index, they seldom get investors out of harm’s way – as people had (wrongly) assumed they tried to do. And fifth, it has long been known that 90% of portfolio return variability depends on where you invest not which securities you select from within exposures.

With a huge array of ETFs investors can get more benefit through holding a diversified global multi-asset portfolio of ETFs. This, coupled with the radical transparency of the Internet, makes traditional active seem doomed.

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