Archive for the ‘Finance’ Category

Passive investing is cheap, but not free

Saturday, March 5th, 2016

Excellent article by Matt Levine

Passive investing is a way to make different fund managers compete with each other by forcing them to offer the same product. That competition lowers management fees for the customer. Unfortunately, the predictability of passive funds also makes them targets for other players in the market.

On one hand you have actively managed funds that are opaque and difficult for the consumer to monitor, and that charge high management fees which have to be balanced against their difficult-to-monitor performance. On the other hand, you have a low management fee passive fund which loses money to other market participants in an open market.

Seen this way, passive funds are still a better deal for consumers because it’s difficult to imagine anyone making an outsized profit without facing competition and having those profits be competed away / shared with the consumer.