Author: GG
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The impact of passive investing on markets
In this section and the following, we will explore how the growth in passive management will make the equity markets more efficient and decrease the variance of security pricing. However, we need to elaborate on a few key insights. First, what does it mean for markets to be efficient? Per Investopedia, “Market efficiency is the…
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The disadvantages of ETFs
ETF expense ratios are usually significantly lower than similar mutual fund competitors. That’s not surprising, given ETF providers do not have to perform in-house accounting, budget for marketing costs, and pay enormous fees for asset managers. However, not all ETFs cost the same for issuers to manage because of differences in methodology, liquidity, and composition.…
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The disadvantages of mutual funds
Thanks to a Dutch merchant, the open-end mutual fund structure has been around since the 18th century. Mutual funds were introduced to the United States in the 1890s and gained popularity in the 1920s. The modern mutual fund has forgone additional changes to satisfy regulations. Currently, most retail assets are managed in open-end mutual funds.…
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What entails being a passive investor, and why are most not?
The common perception is that if one invests in ETFs or indices like the S&P 500, one is being “passive.” The media has additionally confused the definition by considering any rule-based or systematic strategy as passive investing. This poor understanding has led many investors astray, creating passive portfolios with poor diversification. Furthermore, it has introduced…
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Why do active managers underperform?
Participants in financial markets are engaging in a zero-sum game. Someone must underperform for any investor to generate excess returns over the market. Alpha works the same way; for every manager that has produced positive alpha, there must be someone that produced negative alpha. Yet, we know superstar managers who have made their clients rich.…