Broad Is the New Narrow: How Passive Investing Creates Concentrated Portfolios
6 Pages Posted: 20 Dec 2015
Date Written: December 1, 2013
Passive investing, particularly in emerging markets, has become an increasingly popular means of quick, “diversified” exposure to a particular segment of the markets. Flows into passive emerging market products have been so strong that assets in exchange-traded funds (ETFs) designed to capture this region of the world now rank second behind ETFs tracking the S&P 500 Index. Yet it’s the presumption of diversification that can lead investors astray. The number of companies available for investment in emerging markets is greater than that in developed markets, reflecting vast opportunity. Yet, the indices (and ETFs tracking these indices) designed to reflect emerging markets tend to be heavily concentrated in just a handful of companies. For investors seeking greater potential in emerging markets and enhanced diversification benefits, active managers may offer an attractive alternative.
Keywords: passive investing, active investing, ETFs, emerging markets
JEL Classification: G10, G11, G14, G15, G20, G22, G23, G30
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