If there’s one debate that has captivated the investment landscape, it has to be active portfolio management versus passive index funds.
There is plenty of research that proves consistently beating the market continues to be difficult. And as a result, many investors – both retail and institutional – are giving up their active funds and focusing on owning the market. Index funds like the SPDR S&P 500 ETF (SPY) are now commonplace staples amongst plenty of portfolios.
However, investors may want to rethink dumping all their actively managed holdings.
According to a new study, active has beaten passive in recent months. For investors, though, the answer isn’t simply a one or the other proposition. The reality is we may need both to succeed.
Great Environment for Active
The battle between active and passive comes down to two fronts. One is costs. Passive index funds and ETFs are some of the lowest cost investment vehicles you can own. As a result, they don’t need to overcome their costs to generate a return. However, an active fund charging 1.25% needs to make at least that much in order to produce a positive return. With that, many active funds lag behind index funds solely because of their high costs.