Are Passive Funds Really Superior Investments: An Investor Perspective

Forthcoming in the Financial Analysts Journal

30 Pages Posted: 7 May 2019

See all articles by Edwin J. Elton

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Andre de Souza

St. John's University - Department of Economics and Finance; New York University (NYU) - Department of Finance

Date Written: February 23, 2019

Abstract

A number of papers have demonstrated that over historical periods, a specified set of factors have outperformed actively managed funds. However, in almost all cases, the factors employed or the procedures followed are not replicable by tradable passive investments. In addition, tradable passive investments have expense ratios which almost always cause them to underperform indexes. The purpose of this paper is to find a small set of exchange traded funds which capture most of the variation in the population of potential indexes and to see if a combination of this small set of exchange traded funds can be identified which outperform active mutual funds in future periods.

Keywords: Performance, mutual funds, ETFs

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and de Souza, Andre, Are Passive Funds Really Superior Investments: An Investor Perspective (February 23, 2019). Forthcoming in the Financial Analysts Journal. Available at SSRN: https://ssrn.com/abstract=3368473

Edwin J. Elton

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Andre De Souza

St. John's University - Department of Economics and Finance ( email )

101 Astor Place, #244
New York, NY 10003
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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