Passive vs. Active – The Big Picture

Yesterday I spent some time with Eric Balchunas recording a Masters in Business podcast. Balchunas is a senior ETF analyst at Bloomberg Intelligence and the author of “The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions

It’s a fun conversation I’m sure everyone will enjoy.

There are parts of our discussion that I thought were obvious, but he struck me as unappreciated: first and foremost, the sharp disruption of low-cost funds and ETFs.

What is clear is that cheaper is better than more expensive; That there are inherent costs involved in managing an active portfolio which includes research, analysis, PM etc. apart from just trading and taxes. Perhaps most important are the behavioral benefits of passives.

Say what you will about the benefits of passive investing, but Eric argues that if a shop like Vanguard were launched only Low-cost active investing (and never focused on passive), it will grow into a trillion-dollar colossus regardless.

This is an interesting thesis that, unfortunately, we cannot test in the real world. It is certainly possible that this could happen (I remain skeptical). Certainly, ETF and fund fees compound over time, and it doesn’t matter whether they’re passively or actively managed. But that’s not the same as becoming one of the world’s most influential wealth managers.

Another problem was the “unsoundness” of belief systems among academics who research low-cost passive investing. I am amazed and dismayed to see professors willing to throw away their objectivity/reputation by pushing absurd ideas on behalf of the active industry. Given how many billions of dollars low-cost passives have cost the industry – Balchunas estimates it’s now over a trillion dollars – perhaps I shouldn’t be so surprised…

Regardless, a fun conversation that will be posted a week from Friday.

see more:
How expense ratios and star ratings predict success
Russell Kinnell
Morningstar, August 9, 2010

in the past:
Don’t blame Morningstar for our own mistakes (October 26, 2017)

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