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Commentary

Active and Passive Branch Out

We now live in a four-bucket investment world: beta, strategic beta, active, and alternative.

The rise of passive investing has clearly been one of the dominant investment stories of the past few decades. But while indexing has won investors' minds, our hearts still yearn for active. It's the age-old battle between philosophy and poetry played out in a modern investment setting. Reason tells us that buying and holding the whole market at the lowest possible cost and maximum tax efficiency is the virtuous path. Our emotions suggest we can do even better if we deviate here and there, slice up the market into smaller bits, tilt the portfolio to current trends, or even play a hunch every once in a while. The velocity of money in index funds, particularly index ETFs, suggests that long-term reason is frequently overruled by short-term passion.

The desire to tinker, to add action even to passive, is seen in the ongoing division of investment offerings. The split between active and passive has been followed by mutations toward greater activity in each of these categories. Strategic beta has evolved as a more active version of beta, and alternative investing has risen as a more dexterous form of active management. We now live in a four-bucket investment world: beta, strategic beta, active, and alternative. That three of the four buckets are nonpassive reflects our poetic, emotional side. Still, reason has its say in all four buckets; costs and tax efficiency are a standard to which offerings in each bucket are held. Even if you've never put a penny in index funds, you benefit from the increased attention they bring to these variables.