Does the Growth of Passive Investing Make Opportunities for Active Investors?
Inclusion in an index can boost a stock's market valuation, but whether this presents an opportunity for active investors is far less certain.
Asset growth in index funds and index ETFs has been remarkable in recent years, so one might naturally wonder what this trend means for investors using active strategies--that is, choosing individual stocks or hiring a fund manager to do so as opposed to buying stocks in an index-defined basket. In particular, how does being part of an index affect the prices of individual stocks in that index, and does this create opportunities for active investors?
At first blush, one might not expect the increased use of index funds and ETFs to have any impact at all on active investors. After all, isn't everyone investing in the same market, and isn't that market pretty efficient at pricing stocks? The answer isn't quite so cut-and-dried, however.