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Rekenthaler Report

Passive or Active?

Three types of mutual funds that straddle the line.

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Fish or Fowl?
The investment community is currently discussing whether so-called smart beta strategies are active or passive. That discussion continues a longstanding debate about where the line between active and passive funds should be drawn--a debate that is now more than 30 years old.

It began when Dimensional Fund Advisors launched its first fund in 1981. While ostensibly an index provider--DFA was founded by University of Chicago MBAs who had been influenced by recent Nobel Laureate Gene Fama, who had preached to them the gospel of efficient markets--DFA diverged from other index-fund managers by creating its own indexes rather than using existing benchmarks, and in its willingness to let its funds drift from those indexes if that meant saving on trading costs. The latter tactic has served DFA well, as its funds have typically beaten the theoretical results of their underlying indexes.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.