QOTD: Is Fundamental Indexing Passive or Active?

ETF.com: "I've seen the term "quasi-active" thrown around in reference to smart-beta indexes. Do you think that's an accurate term?"

Rob Arnott: Absolutely. If you view the Fundamental Index strategy or any of the smart-beta strategies through the prism of finance theory—which centers on the cap-weighted market as the starting point for everything—they are all active strategies. They don't actively choose stocks based on some analyst's view; they choose stocks based on some algorithm. And if that algorithm severs the link between price and the weight in the portfolio, it appears through extensive historical testing, which adds about 2 percent per year all over the world, spanning decades. Well, that's cool. And it doesn't have to be the Fundamental Index method, it can be darts.

So, are these strategies active? From the vantage point of the market, which is cap-weighted, of course they're active. Turning it around, is the market active relative to the economy? Absolutely. The market is making enormous active bets on which companies are going to be extraordinary in the years ahead. Look at Facebook, Tesla, Twitter. They all carry valuations that would require monumental growth in the years ahead merely to justify current prices. Is that growth going to happen? Sure it could, but the market is already betting that it's a foregone conclusion, so the market is making big active bets, not relative to itself, but relative to the broad macro economy.

The Fundamental Index looks passive relative to the macroeconomy, and active relative to the market. The market looks active relative to the macroeconomy, and by definition, passive relative to the market itself.

Rob Arnott is the father of fundamental indexing, in many ways (at least a courtroom said so not long ago), so it is interesting to hear this take on how even a passive market index, at its core, is also being active in relation to the economy. I’m inclined to agree – there isn’t anything that could ever be truly passive so long as humans set the weights and drive prices. There are only degrees of activity and controllable costs.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. 토토 commented on Dec 24

    … [Trackback]

    […] Read More on that Topic: thereformedbroker.com/2015/01/26/qotd-is-fundamental-indexing-passive-or-active/ […]

  2. faux tag heuer grand carrera 20003 commented on Dec 30

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2015/01/26/qotd-is-fundamental-indexing-passive-or-active/ […]

  3. 100 cm sex dolls commented on Dec 31

    … [Trackback]

    […] Here you can find 20820 more Information on that Topic: thereformedbroker.com/2015/01/26/qotd-is-fundamental-indexing-passive-or-active/ […]

  4. Altronix AL600ULXB manuals commented on Jan 20

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2015/01/26/qotd-is-fundamental-indexing-passive-or-active/ […]

  5. poker online commented on Jan 21

    … [Trackback]

    […] Here you can find 13318 additional Info on that Topic: thereformedbroker.com/2015/01/26/qotd-is-fundamental-indexing-passive-or-active/ […]