The Active World of Passive Investing
Western Finance Association (WFA) Annual Meeting (2018)
50 Pages Posted: 27 Jul 2018 Last revised: 28 Jan 2020
Date Written: January 10, 2020
We investigate the new reality of exchange-traded funds (ETF) and show that, just as many active mutual funds are “closet indexers”, many ETFs are active investments in form or function. We extend the Berk and Green (2004) model to show how skill and scale in ETFs influence their size and return. We find that most ETFs are highly active (median Activeness Index of 93.1%) and that more active ETFs are gaining market share over less active ETFs. The opposite is true for mutual funds. Consequently, the market overall is not considerably more passive and informational efficiency is not negatively affected.
Keywords: exchange-traded fund, ETF, Activeness Index, passive investing, index investing
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation