When Should Investors Choose an Alternative to Passively Investing in a Capitalization-Weighted Index?

22 Pages Posted: 17 Jul 2010

See all articles by Don Ezra

Don Ezra

Russell Investments - New York

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: July 15, 2010

Abstract

We present a framework for deciding when to choose an alternative to passively investing in capitalization-weighted indices within any particular asset class. Five reasons are identified for seeking an alternative. Three of these reflect situations where a capitalization-weighted index is either unavailable or unsuitable, while the other two relate to expectations that active management can outperform the index. We highlight the need to shift the debate over active versus passive investing towards a broader discussion that takes into account aspects such as differences across investors and the efficacy of the index itself. Our key message is that the best way to structure asset class portfolios is likely to depend on the circumstances.

Keywords: Investment management

JEL Classification: G11, G23

Suggested Citation

Ezra, Don and Warren, Geoffrey J., When Should Investors Choose an Alternative to Passively Investing in a Capitalization-Weighted Index? (July 15, 2010). Australian Centre for Financial Studies - Finsia Banking and Finance Conference 2010. Available at SSRN: https://ssrn.com/abstract=1640921 or http://dx.doi.org/10.2139/ssrn.1640921

Don Ezra

Russell Investments - New York ( email )

590 Madison Avenue
New York, NY 10022
United States

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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