For many advisors, indexing has become a default way to access the broad market, but the time has come to apply real scrutiny to this approach. For much of the past 50 years, index funds have been a net positive for investors, who have moved from expensive and concentrated conventional active strategies to a more diversified and low-cost option. As trillions of dollars have flown into index funds, though, their limitations have become more apparent. Index funds may not be as passive or as low-cost as they appear. Their rigid trading—with the goal of minimizing tracking error (a common measure of performance deviation between a portfolio and a benchmark)—can create a performance drag that is not captured in fees and expenses. The science of investing has advanced, and institutional investors should demand better solutions to meet their needs.
Rob Harvey, CFA® will be presenting on our updated research quantifying the costs associated with indexing.
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