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    • Wed Aug 13th 16:21 PM
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      Why Index Investing Isn't Passive Investing
      Just because the index is actively managed does not mean the TRACKING FUND is managed any more actively than is necessary to maintain the index composition. That' is indeed the very definition of PASSIVE investment management. Indexes are not investments, so an actively-managed index is not an actively-managed investment. To maintain the proper perspectives of apples vs. oranges, you have to compare passive investment management with active INVESTMENT MANAGEMENT, not active INDEX MANAGEMENT.

      The reason that "actively-managed indices significantly outperform a genuinely passive buy-and-hold strategy", as shown by the researchers, is that buy-and-hold does not ever give you any exposure to the "active management" elements you described: "Listing requirements and changing components and survivorship bias". One way to look at it, from the perspective of passive investors, is that the professional managers of indexes perform these activities at no cost to you so that your index fund managers don't have to - which would indeed cost you and which most certainly would harm performance. Those activities do indeed yield results that we all will expect to outperform buying and holding of a never-changing selection of stocks, many of which over time will change to stocks which we never would have selected in the first place, much less blindly held to the point where "survivorship&quo... failure becomes a negative bias on the portfolio.

      All the paper shows is that "actively-managed indices significantly outperform a genuinely passive buy-and-hold strategy" - IN STOCKS. An investor who is indeed following "a genuinely passive buy-and-hold strategy" in index-tracking funds is NOT the investor who will experience the underperformance described in the study. That investor is one who buys and holds stocks, never developing "listing requirements" (so to speak), never "changing composition" (don't passive investors ever even re-balance?) and fully experiencing "survivorship bias" - to the downside. I mean, who even invests this way?
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