Jack Bogle, index fund pioneer, expressed concern before his death about the rise of index funds and that they may not necessarily “serve the national interest,” according to Financial Times. A rise in the popularity of passive investment vehicles and the potential power that some of the largest indexers could have as shareholders meant a potential deviation from the best interests of markets and investors in his eyes.
Passive funds such as ETFs and mutual funds currently account for roughly $17 trillion of assets under management, making up an estimated 20% of all stocks available globally.
Critics of index-tracking funds such as Michael Burry of Scion Asset Management have been very vocal that because of the structure of indexed funds, the biggest cap companies are artificially inflated as they reap larger shares of inflows. It causes what Burry described as a top-heavy market that creates bubbles.
Moreover, securities are selected for their size, not based on their fundamentals, creating what he dubs as an “index premium” where all securities within a fund benefit, regardless of their individual merits.
The Active Touch
Active managers, on the other hand, focus on the fundamentals of every security that they select. They research to select the important values to their portfolios instead of buying into broader, passive funds that may include securities that are not important to the investor.
With passive funds making up only 20% of stocks, that means that active managers and active traders are fulfilling the vital role of price discovery within markets or the price that buyers and sellers are willing to trade at. By selecting securities based on the researched fundamentals, price discovery can be argued to be occurring at actual value instead of what Burry believed to be inflated worth in passive funds.
Active management has increased in popularity in the last year, as it is preferred in more volatile markets with less liquidity. A recent survey by Bank of America revealed that 70% of active managers outperformed the Russell 1000 Index in May. The Russell 1000 Index measures the top 1,000 companies in the U.S. by market cap, and this percentage of active management beating this benchmark was a record high.
T. Rowe Price believes in the difference and benefits of active management. The firm currently offers five actively managed ETFs covering a variety of investment goals. The firm brings a bevy of experience and research to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.
For more news, information, and strategy, visit the Active ETF Channel.