By |Published On: February 7th, 2017|Categories: Behavioral Finance, Active and Passive Investing, ETF Investing|

We all hear about the massive move away from active to passive in the US market. We also hear arguments that passive may eat the world and that active management is a zero sum game (seems like a reasonable hypothesis, but I’m not so sure).

Here is a figure from a recent CS report that highlights the US activity and the clear move away from active and into passive:

us passive and active

Source: CS, “Looking for Easy Games”

All of this chatter seems viable from a US-based perspective.

Interestingly enough, you don’t have to look that far to see a completely different narrative playing out. When we look North to Canada and we see an entirely different game playing out:

Thanks to Ben Johnson for highlighting this research report!

Source: Morningstar. Thanks to Ben Johnson for highlighting this research report and thanks to Art Johnson for bringing this to our attention!

The Canadian market highlights a completely different story — a move towards more active and a move away from the tiny amount of passive already in place.


Here is a comparison chart of the move to passive between the US and Canadian markets:

Source: Morningstar

Source: Morningstar

What is going on?

The real answer is “who knows,” but the Morningstar Canadian crew has an answer:

Big banks, incentives, and backward self-regulation are to blame.

Incentives certainly play a role. Perhaps recent past performance also plays role? Maybe even culture?

My takeaway is that the narrative claiming that passive is going to destroy and/or eat the financial world is too simplistic. There are a lot of mechanisms at work in the financial marketplace and their interaction effects are extremely hard to predict. I don’t have the answers and I can’t predict the future, but it will sure be fun to see how it all plays out!

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About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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