Tuesday, September 19, 2017

Which came first––active or passive investing?

Active vs. Passive investing styles is an age-old debate in the investing world. Investment managers on either side tend to be steadfast advocates of the merits of their approach. Active managers seek to exploit market inefficiencies by relying on analytical research, forecasts, and their own judgement and experience to decide which securities to buy, hold, and sell. Passive investing involves simply tracking an index to avoid the management fees and trading costs that can be a drag on performance by adhering to a buy-and-hold strategy.

After the stock market crash of 1929, when highly-leveraged investments failed, the first actively-managed mutual fund was launched. In the 1980s and ‘90s, ‘bull market mania’ made active fund managers like Peter Lynch, the manager of the Fidelity Magellan Fund, a household name, and money flowed into the retail mutual fund industry.

Surprisingly, although the S&P 500 Index celebrated its 60th anniversary this year, the first S&P 500 index fund wasn’t introduced until August 31, 1976 by Vanguard founder Jack Bogle. Due to the popularity of passive investing, low-cost index funds have moved far beyond just tracking the S&P 500. 

Today, Vanguard alone has more than 60 unique funds that track indexes across the bond and stock markets, as well as sector-specific index funds. Exchange-traded funds (ETFs) have also become a popular vehicle for passive investors. ETFs are marketable securities that typically track an index, but trade like a common stock. First introduced in 1993, ETFs have allowed investors endless flexibility in how they choose to move in and out of sectors and make tactical bets. ETF assets have grown from $100 billion in the 1990s to almost $2.5 trillion today.

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In Active vs. Passive Investing Styles: An Age Old Rivalry, SBS traces the origins of the active and passive investing styles, dives into the historical performance and asset flow trends of each, and addresses how plan sponsors can make prudent decisions about employing each investing style.

If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.