Passive investing strategies, including index funds and ETF's have enjoyed enormous growth in recent years and for good reason - their promise of low-cost market tracking and diversification has obvious appeal. Given that their performance often compares very favourably to that of active management, particularly net of fees, there is a lot to like. However, as passive strategies become an ever-larger proportion of the overall market, new risks are introduced that are typically not well understood.
While many criticisms of active management are well-founded (particularly in the case of ‘closet indexers’), active management performs important functions in the markets. It is somewhat ironic that, in order for passive strategies to work as intended, they are reliant on active managers to provide valuation parameters and liquidity.
I had an article published in the Globe & Mail on May 19, 2020 that discusses the under-appreciated risks of ETF's which might be of interest.
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