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The active world of passive investing

The active world of passive investing

11-09-2019 | From the field

Thought exchange-traded funds (ETFs) were passive? Think again! This paper1 investigates ETFs and their impact on the overall activeness of the market.

  • David Blitz
    David
    Blitz
    Head of Quant Research

The authors argue that many ETFs are active investments in both form and function. For instance, the median active share of ETFs is found to be 93.1%, and their median tracking error amounts to a whopping 8.8% per annum, measured against the passive market portfolio.

Moreover, more active ETFs are gaining market share at the expense of less active ETFs. On balance, the authors find that the rise of ETFs has not led to the market overall becoming considerably more passive, nor that informational efficiency of the market has been negatively affected. 

1 Easley, Michayluk, O’Hara & Putnins, “The Active World of Passive Investing”, working paper, 2018.

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