A Fine Line in the Active Versus Passive Debate

An increasing number of investors are actively using beta in their attempt to create alpha

John Gabriel 20 March, 2012 | 12:43PM
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With the growing popularity of exchange-traded funds, and passive products in general, many industry observers have speculated on the demise of active portfolio management. However, I would argue that, in reality, active management remains as alive as ever.

Rather than outsourcing active management, many investors are taking matters into their own hands. Using products like ETFs to underweight or overweight certain market segments (beta) in an effort to achieve relative outperformance (alpha) is one of the more-pronounced trends in the industry today.

Although the products themselves are passively managed, they are being used tactically in an active manner by investors seeking to execute certain objectives--whether it be income, capital preservation, or even to outperform the market. Passive investments have dominated recent fund flows in North America. Strong demand has driven the share of passive assets, as a percentage of total fund industry assets, to rise steadily to more than 20% today from about 2% in 1995 (ETFs represent roughly half of total passive assets).

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About Author

John Gabriel  is an ETF strategist with Morningstar, responsible for Canadian ETF research.