by Cullen Roche, Pragmatic Capitalism
The Pitfalls of the Passive Investing Marketing Pitch
Hereās a crazy headlineĀ from Reuters:
"Largest exodus in five years hits
U.S.-based stock mutual funds: ICI"
This is what most people will describe as the migration from āactiveā to āpassiveā.Ā In other words, index funds are taking the place of more active stock picking funds. Of course, regular readers know thereās no such thing as passive investing. Ā And this debate is front and center in the context of this exodus into index funds because all index funds are not what they might claim.
As an example, I was perusing Twitter this afternoonĀ when the very excellent Jeffrey Ptak highlighted this new fund offering:
'Frontier Advantaged Diversified Tactical' ETF that tracks an 'index' and costs 1.06%. Ticker TCTL but s/b NOPE https://t.co/A41fz1UL2G
— Jeffrey Ptak (@syouth1) October 26, 2016
When you open the Prospectus we find the following description:
Principal Investment Strategies of the Fund
The Fund is a āfund of fundsā that employs a āpassive managementāāor indexingāinvestment approach designed to track the performance of the Index. The rules-based Index measures the performance of a diversified portfolio of exchange traded funds (āETFsā) representing common global equity, fixed income, and cash asset classes.
Uh oh. There it is. That word, āpassiveā. So, what we have here is a fund that will employ a tactical strategy (read, higher turnover than a traditional index fund) inside a wrapper that costs 1.06% (more than 1% higher than the lowest cost index funds). Ā This is active management by another name! Whatās now happening is that all of these funds that traditionally got wrapped in mutual funds are now being wrapped in ETFs. And because an ETF tracks its own internal āindexā it can call itself āpassiveā. So, we have assets flowing from āactiveā mutual funds into āpassiveā ETFs that are actually active strategies charging high fees.
As Iāve long been saying, you have to be really careful about how you allocate your assets in this new world where the term āpassiveā investing has lost its meaning.Ā¹ We want to believe that āpassiveā is good and āactiveā is bad, but the line has been blurred. The term passive has lost its meaning to the point where itās now a useless concept.
Conclusion: I say keep it simple. Refer to everything as active and study these different products on their actual merits and not the marketing pitches that the media and the fund companies use to oversimplify their descriptions. Ā This will help you avoid many of the pitfalls when allocating your savings.
Ā¹ ā See, The Myth of Passive Investing
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