The desire to best the markets through active investment management perhaps stems from the same intrepid spirit that sent Sir Edmund Hillary to the summit of Mount Everest and Neil Armstrong to the moon. While similar legends have been made trumping the financial markets (think of Warren Buffett or Anthony Bolton), the truth is that, as with any endeavor, there have been both winners and losers along the way. The winners inspire hope among the masses that they too can achieve greatness, while the losers are often forgotten. (In the investment industry this is often referred to as survivorship bias.)
With active investment management appealing to our most basic human aspirations, taking a passive approach to investing may at first seem rather defeatist. While active investors may be looking to reach the top of a mountain or plant a flag on the lunar surface, the passive bunch might be perfectly happy to stay warm at base camp, feet firmly on the ground. But let's move out of the realm of drawn-out analogy and into financial theory to explore the principles of passive investing and how ETFs can fit into a passive investment strategy.