Editing Passive management (section)

{{Short description|Market-weighted investing strategy}}
{{Use mdy dates|date=August 2014}}
{{Personal finance}} 
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'''Passive management''' (also called '''passive investing''') is an investing strategy that tracks a market-weighted index or portfolio.<ref name=":0">{{Cite web|title = The Arithmetic of Active Management|url = https://web.stanford.edu/~wfsharpe/art/active/active.htm|website = web.stanford.edu|access-date = 2015-08-15|last = Sharpe|first = William}}</ref><ref>{{Cite journal|title = Fact, Fiction, and Value Investing|ssrn = 2595747|date = 2015-06-01|location = Rochester, NY|first1 = Clifford S.|last1 = Asness|first2 = Andrea|last2 = Frazzini|first3 = Ronen|last3 = Israel|first4 = Tobias J.|last4 = Moskowitz}}</ref> Passive management is most common on the [[stock market|equity market]], where index funds track a [[stock market index]], but it is becoming more common in other investment types, including [[bond (finance)|bond]]s, [[Commodity|commodities]] and [[hedge fund]]s.<ref name="three">Burton G. Malkiel, A Random Walk Down Wall Street, W. W. Norton, 1996, {{ISBN|0-393-03888-2}}</ref> There has been a substantial increase in passive investing over the last twenty years.<ref>{{Cite journal |last1=Haddad |first1=Valentin |last2=Huebner |first2=Paul |last3=Loualiche |first3=Erik |date=2025 |title=How Competitive Is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing |url=https://www.aeaweb.org/articles?id=10.1257/aer.20230505 |journal=American Economic Review |language=en |volume=115 |issue=3 |pages=975–1018 |doi=10.1257/aer.20230505 |issn=0002-8282|url-access=subscription }}</ref>

The most popular method is to mimic the performance of an externally specified [[Index (economics)|index]] by buying an [[index fund]]. By tracking an index, an investment portfolio typically gets good diversification, low turnover (good for keeping down internal [[transaction cost]]s), and low management fees. With low fees, an investor in such a fund would have higher returns than a similar fund with similar investments but higher management fees and/or turnover/transaction costs.<ref name="two">William F. Sharpe, [http://www.stanford.edu/~wfsharpe/art/talks/indexed_investing.htm Indexed Investing: A Prosaic Way to Beat the Average Investor]. May 1, 2002. Retrieved May 20, 2010.</ref>

The bulk of money in Passive index funds are invested with the three passive asset managers: [[BlackRock]], [[The Vanguard Group|Vanguard]] and [[State Street Corporation|State Street]]. A major shift from assets to passive investments has taken place since 2008.<ref>[https://www.cambridge.org/core/services/aop-cambridge-core/content/view/30AD689509AAD62F5B677E916C28C4B6/S1469356917000064a.pdf/hidden_power_of_the_big_three_passive_index_funds_reconcentration_of_corporate_ownership_and_new_financial_risk.pdf] Hidden power of the Big Three? Passive index funds, re-concentration of corporate ownership, and new financial risk | Jan Fichtner, Eelke M. Heemskerk and Javier Garcia-Bernardo | Business and Politics 2017; 19(2): 298–326 | Conclusion</ref> 

Passively managed funds consistently outperform actively managed funds.<ref>{{Cite news |date=2022-12-02 |title=Mutual Funds That Consistently Beat the Market? Not One of 2,132. |language=en |work=New York Times |url=https://www.nytimes.com/2022/12/02/business/stock-market-index-funds.html |access-date=2023-08-21}}</ref><ref name=":12">{{Cite journal |last=Choi |first=James J. |date=2022 |title=Popular Personal Financial Advice versus the Professors |journal=Journal of Economic Perspectives |language=en |volume=36 |issue=4 |pages=167–192 |doi=10.1257/jep.36.4.167 |issn=0895-3309 |doi-access=free}}</ref><ref>{{Cite journal |last=Malkiel |first=Burton G. |date=2013 |title=Asset Management Fees and the Growth of Finance |journal=Journal of Economic Perspectives |language=en |volume=27 |issue=2 |pages=97–108 |doi=10.1257/jep.27.2.97 |issn=0895-3309|doi-access=free }}</ref> More than three-quarters of active mutual fund managers are falling behind the [[S&P 500]] and the [[Dow Jones Industrial Average]]. The S&P Indices versus Active (SPIVA) scorecard, which tracks the performance of actively managed funds against their respective category benchmarks, recently showed 79% of fund managers underperformed the S&P last year. It reflects an 86% jump over the past 10 years.<ref>{{Cite web |last=Meyers |first=Josh |date=2022-03-27 |title=New report finds almost 80% of active fund managers are falling behind the major indexes |url=https://www.cnbc.com/2022/03/27/new-report-finds-almost-80percent-of-active-fund-managers-are-falling-behind.html |access-date=2024-02-08 |website=CNBC |language=en}}</ref><ref>{{Cite web |title=Instant Insights: Key Takeaways From Our Research |url=https://www.spglobal.com/ratings/en/research/articles/200204-coronavirus-impact-key-takeaways-from-our-articles-11337257 |access-date=2024-02-08 |website=www.spglobal.com |language=en-us}}</ref> In general, actively managed funds have failed to survive and beat their benchmarks, especially over longer time horizons; only 25% of all active funds topped the average of their passive rivals over the 10-year period ended June 2021.<ref>{{Cite web |date=2021-10-14 |title=Most Active Funds Have Failed to Capitalize on Recent Market Volatility |url=https://www.morningstar.com/economy/most-active-funds-have-failed-capitalize-recent-market-volatility |access-date=2024-02-08 |website=Morningstar, Inc. |language=en}}</ref> Investors, academicians, and authors such as [[Warren Buffett]], [[John C. Bogle]], [[John J. Brennan (businessman)|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.<ref name="Investors_info05">
* {{Cite web |last=Pisani |first=Bob |date=2022-10-03 |title=Billionaire Warren Buffett swears by this inexpensive investing strategy that anyone can try |url=https://www.cnbc.com/2022/10/03/billionaire-warren-buffett-swears-by-this-inexpensive-investing-strategy-that-anyone-can-try.html |access-date=2024-02-08 |website=CNBC |language=en}}
* {{Cite news |last=Krishnan |first=Aarati |date=2022-08-07 |title=Why Buffett bats for index funds |url=https://www.thehindu.com/business/markets/why-buffett-bats-forindex-funds/article65738479.ece |access-date=2024-02-08 |work=The Hindu |language=en-IN |issn=0971-751X}}
* {{Cite web |last=CFP® |first=Emmie Martin |date=2018-01-03 |title=Warren Buffett just won a $1 million bet—and highlighted one of the best ways to grow wealth |url=https://www.cnbc.com/2018/01/03/why-warren-buffett-says-index-funds-are-the-best-investment.html |access-date=2024-02-08 |website=CNBC |language=en}}
* {{Cite web |title=Warren Buffett on Index Funds |url=https://www.nasdaq.com/articles/warren-buffett-index-funds-2017-06-25 |access-date=2024-02-08}}
* {{Cite web |date=2019-01-23 |title=40 years after his "folly," Bogle's index funds reign |url=https://apnews.com/article/171a636f31b24167ae3c81cb77bcf695 |access-date=2024-02-08 |website=AP News |language=en}}
* {{Cite web |title=John Bogle's Advice: Live Long and Prosper, on Index Funds |url=https://knowledge.wharton.upenn.edu/article/john-c-bogles-advice-live-long-and-prosper-on-index-funds/ |access-date=2024-02-08 |website=Knowledge at Wharton |language=en-US}}
* Siegel, J.J. (2019). Climbing Mount Everest: Paul Samuelson on Financial Theory and Practice. In: Cord, R., Anderson, R., Barnett, W. (eds) Paul Samuelson. Remaking Economics: Eminent Post-War Economists. Palgrave Macmillan, London. {{doi|10.1057/978-1-137-56812-0_13}} 
* {{Cite web |title=Financial Wisdom from Jack Brennan, Former CEO of Vanguard |url=https://www.boldin.com/retirement/financial-wisdom-from-jack-brennan-former-ceo-of-vanguard/ |access-date=July 15, 2021}}
* {{Cite web |title=Interview with Eugene Fama |url=https://www.minneapolisfed.org/article/2007/interview-with-eugene-fama |access-date=December 1, 2007}}
* {{Cite web |title=Are index funds still the way to go? |url=https://yalealumnimagazine.org/articles/5729-are-index-funds-still-the-way-to-go |access-date=October 15, 2023}}
* {{Cite web |title=Burton Malkiel Advocates for Direct Indexing |url=https://www.nasdaq.com/articles/burton-malkiel-advocates-for-direct-indexing |access-date=February 21, 2024}}
* {{Cite web |title=Unless you're Warren Buffett, you're better off investing in an ETF, top economist says |url=https://finance.yahoo.com/news/unless-youre-warren-buffett-youre-010000011.html |access-date=March 13, 2024}}
* {{Cite web |title=Paul Samuelson and the Birth of the Index Fund |url=https://community.macmillanlearning.com/t5/economics-blog/paul-samuelson-and-the-birth-of-the-index-fund/ba-p/3279 |access-date=September 3, 2011}}
* {{Cite web |title=Burton Malkiel Advocates for Direct Indexing |url=https://www.nasdaq.com/articles/burton-malkiel-advocates-for-direct-indexing |access-date=February 21, 2024}}
* {{Cite web |title=How To Build A Complete Benjamin Graham Portfolio |url=https://www.grahamvalue.com/article/how-build-complete-benjamin-graham-portfolio |access-date=April 10, 2020}}
* {{Cite web |title=Benjamin Graham: Passive Advocate? |url=https://www.etf.com/sections/features/benjamin-graham-passive-advocate |access-date=Jul 20, 2023}}</ref>