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Radioactive II: Could the Tide Finally Be Turning for Active vs. Passive?

By Advisor Perspectives
Asset Management

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Key Points

  • Both active and passive management styles have a home in investors’ portfolios.
  • Passive continues to outperform active, but we may have seen the inflection point.
  • Plunging correlations and wider sector dispersion both bode well for active styles.

I’m often asked how I invest my own money and often imbedded in the question is whether I prefer active or passive investing strategies. My answer is always both, and at Schwab we generally believe investors can benefit from traditional active management; e.g. mutual funds; alongside newer passive vehicles; e.g. exchange-traded funds (ETFs). But even before the creation of ETFs there were debates about the merits of passive vs. active. I wrote about this topic in February, but it’s time for an update. In addition, my colleague Tony Davidow recently penned an article in which he answers the oft-asked question, “Are ETFs Dangerous?”

The primary advantages of passive investing are low fees, tax efficiency and transparency; but by definition, passive funds will never beat the indexes they track. The primary advantages of active investing are flexibility, the ability to benefit from strong security selection skills, and tax management strategies; but fees are higher and poorly-managed funds can and often do underperform their benchmarks. Blending the two is another way investors can be diversified within their portfolios.

Read more at Advisor Perspectives.

Photo: Nicolas Raymond

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