Do Exchange Traded Funds Distort Value?

A number of high profile commentators have demonstrated that very few professionally managed equity funds have outperformed the market average. Fund managers are active investors. They analyze each company. The interview the CFO and the management team. They perform due diligence on the company and determine whether shares in that company fit within the fund mandate and they then make an investment decision for the fund’s investors. This is what is considered the active component of the stock market. 

The second form of investing is what is called passive investing. This is where you put funds into an index fund and there is absolutely no intelligence being applied to the purchase. The index is computed according to a formula and if there are 500 companies in the index as in the case of the S&P 500, you’re buying a tiny sliver of 500 companies simply by investing in the index fund. 

There’s a lot of evidence that passive index funds have outperformed the active over the longer term. Now passive funds have not been around that long, but over the history passive funds have outperformed active funds. 

So if that’s true, then why take the risk, pay the premium fees associated with a stock mutual fund, and the still end up with inferior performance. 

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Host: Victor Menasce

email: podcast@victorjm.com