[6][7][8] More than three-quarters of active mutual fund managers are falling behind the S&P 500 and the Dow Jones Industrial Average.
[11] Investors, academicians, and authors such as Warren Buffett, John C. Bogle, Jack Brennan, Paul Samuelson, Burton Malkiel, David Swensen, Benjamin Graham, Gene Fama, William J. Bernstein, and Andrew Tobias have long been strong proponents of passive investing.
One such UIT is the Voya Corporate Leaders Trust (LEXCX), which as of 2019 was the oldest passively managed investment fund still in existence in the United States according to John Rekenthaler of Morningstar, Inc.[14] Founded in 1935 as the Lexington Corporate Leaders Trust, LEXCX initially held 30 stocks, closely modeled on the Dow Industrials.
"[16] The theory underlying passive management, the efficient-market hypothesis, was developed at the Chicago Graduate School of Business in the 1960s.
"[18] In 1969, Arthur Lipper III became the first to try to turn theory into practice by petitioning the Securities and Exchange Commission to create a fund tracking the 30 stocks Dow Industrial Average.
[17] The first index funds were launched in the early 1970s, by American National Bank in Chicago, Batterymarch, and Wells Fargo; they were available only to large pension plans.
[19] Research conducted by the World Pensions Council (WPC) suggests that 15% to 20% of overall assets held by large pension funds and national social security funds are invested in various forms of passive funds- as opposed to the more traditional actively managed mandates which still constitute the largest share of institutional investments.
[20][21] The relative appeal of passive funds such as ETFs and other index-replicating investment vehicles has grown rapidly [22] for various reasons ranging from disappointment with underperforming actively managed mandates [20] to the broader tendency towards cost reduction across public services and social benefits that followed the 2008-2012 Great Recession.
[23] Public-sector pensions and national reserve funds have been among the early adopters of passive management strategies.
[21][23] At the Federal Reserve Bank of St. Louis, YiLi Chien, Senior Economist wrote about return-chasing behavior.
[3] The rationale behind indexing stems from the following concepts of financial economics:[3] Advocates for passive management argue that performance results provide support for Sharpe's zero-sum game theory.
John C. Bogle of The Vanguard Group, while a staunch advocate for passive investing overall, also argued in 2018 that the growth in passive management firms would soon result in a concentration of over half of American stock ownership, and associated proxy voting power, among three large firms (Vanguard, State Street Global Advisors and BlackRock).
[32] In 2017, Robert Shiller, a Nobel Prize winning economist at Yale University, stated passive index funds are a "chaotic system" and "kind of pseudoscience" due to what he described as an over-reliance on computer models and a neglect of the businesses whose stocks make up index funds.
"[34] Passive investing may contribute to shareholder apathy, whereby investors are less engaged in the corporate governance process.
Benjamin Braun[35] suggests that, since American stock ownership is concentrated on few big asset managers which are very diversified and do not have a direct interest in the performance of the companies, this emerging "asset manager capitalism" is distinct from the earlier shareholder primacy.
[39] Some funds replicate index returns through sampling (e.g., buying stocks of each kind and sector in the index but not necessarily some of each individual stock), and there are sophisticated versions of sampling (e.g., those that seek to buy those particular shares that have the best chance of good performance).
ETFs usually offer investors easy trading, low management fees, tax efficiency, and the ability to leverage using borrowed margin.
Stock market index futures offer investors easy trading, ability to leverage through notional exposure, and no management fees.
Full replication is easy to comprehend and explain to investors, and mechanically tracks the index performance.
A Loring Ward report in Advisor Perspectives showed how international diversification worked over the 10-year period from 2000–2010, with the Morgan Stanley Capital Index for emerging markets generating ten-year returns of 154% balancing the S&P 500 index, which declined 9.1% over the same period – a historically rare event.
[39] The report noted that passive portfolios diversified in international asset classes generate more stable returns, particularly if rebalanced regularly.
[39] State Street Global Advisors has long engaged companies on issues of corporate governance.