Active and Passive Investing

Investor demand, rating reform and equity returns

By |August 7th, 2023|Price Pressure Factor, Research Insights, Factor Investing, Basilico and Johnsen, Academic Research Insight, Momentum Investing Research, Active and Passive Investing|

The traditional financial theory attributes security returns to market- or factor-based risk, with no role ascribed to other influences. In this research, the authors argue for including investor demand as an additional variable in explaining returns.  Can changes in investor demand generate systematic changes in security returns?

Bigger is Not Always Better in Asset Management

By |December 19th, 2022|Research Insights, Factor Investing, Basilico and Johnsen, Academic Research Insight, Active and Passive Investing|

Pastor, Stambaugh, and Taylor (2015) and Zhu (2018) provide significant evidence of decreasing returns to scale (DRS) at both the fund and industry levels. The authors examine the robustness of their inferences after Adams, Hayunga, and Mansi (2021) critique the above two studies.

Has the Stock Market Systematically Changed?

By |September 20th, 2022|Volatility (e.g., VIX), Research Insights, Active and Passive Investing|

This time is almost always different, it seems, but the data suggest that things are typically always the same: chaotic and volatile. Stock market investors should be prepared for large short-term moves in stocks and they should be skeptical of narratives suggesting a causal relationship between environmental variables and future volatility.

Is Passive Ownership Bigger than Estimated?

By |August 22nd, 2022|Research Insights, Basilico and Johnsen, Academic Research Insight, Active and Passive Investing|

We estimate that passive investors held at least 37.8% of the US stock market in 2020. This estimate is based on the closing volumes of index additions and deletions on reconstitution days. 37.8% is more than double the widely accepted previous value of 15%, which represents the combined holdings of all index funds. What’s more, 37.8% is a lower bound. The true passive-ownership share for the US stock market must be higher. This result suggests that index membership is the single most important consideration when modeling investors’ portfolio choice. In addition, existing models studying the rise of passive investing give no hint that prior estimates for the passive-ownership share were 50% too small. The size of this oversight restricts how useful these models can be for policymakers.

Does Emerging Markets Investing Make Sense?

By |June 17th, 2022|Research Insights, Factor Investing, Key Research, Value Investing Research, Momentum Investing Research, Active and Passive Investing, Macroeconomics Research|

The analysis above suggests that portfolios that include or exclude emerging allocations are roughly the same. For some readers, this may be a surprise, but for many readers, this may not be "news." That said, even if the data don't strictly justify an Emerging allocation, the first principle of "stay diversified" might be enough to make an allocation.

Of course, the assumptions always matter.

Visualizing the Robustness of the US Equity ETF Market

By |June 8th, 2022|Research Insights, Active and Passive Investing|

Market commentators sometimes suggest that the equity ETF market is just a bunch of "index funds" that all do essentially the same thing: deliver undifferentiated stock market exposure.

How true is that statement? Fortunately, we can test the hypothesis that the ETF market is roughly a few thousand different ways to capture the same basic risk/returns. To do so, we leverage our Portfolio Architect tool to quantify the active share of all US equity ETFs against the S&P 500 index (the king of indexes).

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