The Active World of Passive Investing

35 Pages Posted: 27 Jul 2018 Last revised: 4 Sep 2018

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: July 29, 2018

Abstract

We investigate the new reality of exchange-traded fund (ETF) investing and the impact it has on the overall activeness of the market. We argue that, just as many active investment vehicles are “closet indexers”, many ETFs are active investments in both form and function. We extend the Berk and Green (2004) model to include ETFs and show how skill and scale influence their size and return in equilibrium. We find that most ETFs are highly active with a median active share of 93.1% and median tracking error of 8.8% p.a., relative to the passive market portfolio. We find that more active ETFs are gaining market share at the expense of less active ETFs, whereas the opposite is true for mutual funds. We also show that the market overall is not considerably more passive, and that informational efficiency of the market is not being negatively affected.

Keywords: exchange traded fund, ETF, active share, 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 (July 29, 2018). 31st Australasian Finance and Banking Conference 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)

Register to save articles to
your library

Register

Paper statistics

Downloads
316
rank
93,096
Abstract Views
1,022
PlumX Metrics