The Active World of Passive Investing

Western Finance Association (WFA) Annual Meeting (2018)

57 Pages Posted: 27 Jul 2018 Last revised: 23 Mar 2021

See all articles by David Easley

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Date Written: March 23, 2021

Abstract

We investigate the new reality of exchange-traded funds (ETFs). We show that most ETFs are active investments in form (designed to generate alpha) or function (serve as building blocks of active portfolios). We define a new activeness index to capture these dimensions, finding that the cross-section of ETFs is now increasingly characterized by highly active investment vehicles. Active-in-form ETFs have positive flow-performance sensitivity, charge the highest fees among ETFs, and have high within-portfolio turnover. Active-in-function ETFs have more concentrated holdings, less within-portfolio turnover, but higher turnover in the secondary market. We show how more active ETFs are gaining market share over less active ETFs, leading to competitive fee pressure both within the ETF space and across the investment management industry. We suggest that the growing activeness of ETFs may assuage concerns about ETFs harming price discovery.

Keywords: exchange-traded fund, ETF, Activeness Index, passive investing, index investing

JEL Classification: G11, G14, G23

Suggested Citation

Easley, David and Michayluk, David and O'Hara, Maureen and Putnins, Talis J., The Active World of Passive Investing (March 23, 2021). Western Finance Association (WFA) Annual Meeting (2018), Available at SSRN: https://ssrn.com/abstract=3220842 or http://dx.doi.org/10.2139/ssrn.3220842

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Cornell University - Department of Information Science ( email )

402 Bill & Melinda Gates Hall
Ithaca, NY 14853
United States

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Talis J. Putnins (Contact Author)

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

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