Here’s a new fund filing which is both hilarious and sad. The ticker symbol is BIGD, which stands for Big Data. The fund will be comprised of big data firms. I am tempted to short such a fund, however, I feel uncomfortable being anything less than long a ticker such as BIGD.¹ In all seriousness, what I love about this filing is this part:
The Fund uses a “passive” or indexing approach to try to achieve its investment objective. Unlike many investment companies, the Fund does not try to “beat” the Index and does not seek temporary defensive positions when markets decline or appear overvalued.
Some people think I’ve been a Nazi about my war against the idea of “passive investing”, but this is precisely why I’ve tried to establish some clarity on this matter.² This is a fund that creates its own internal “index” and claims to be “passive” while charging 0.75%. I am sorry, but this is absolutely not passive. It is a direct deviation from global cap weighting and is really no different from a high fee mutual fund that creates its own internal benchmark, establishes a certain criteria for picking stocks and then tries to track that internal benchmark across time while claiming that they should not be compared to a highly correlated low fee market cap weighted fund.
This is the world we’re entering and it has me a little worried to be honest. The rise of passive indexing is being cloaked as something it’s not and many investors are getting suckered into buying funds that are little more than closet index funds using the term “passive” all because passive indexers have created this illusion and confusion around their own branding. The truth is, pure passive is a unicorn. It does not exist because no one can track a purely passive index comprised of all global cap weighted assets. And the reason I love this clarity (calling everything some form of active) is that it helps better divide the useful funds from the slick marketing funds. When you view everything as a form of active you can look at each fund objectively for what it is rather than falling into the trap that there is some distinction between “passive” and “active” when that distinction is actually very unclear.
This clarity is a good thing in my opinion and I feel somewhat vindicated as this unfolds over time. A lot of people (like the Bogleheads) got very mad at me and even accused me of having an “agenda” when I first started making this argument a few years back, but it’s now becoming clear that they never took the time to understand the points I was making. Anyhow, I have ranted enough on this subject so I will let it go, but do me a favor – when you buy a fund do not look at it as “active” or “passive”. Instead, view it as active and ask yourself whether it has a level of diversity, tax efficiency and fee efficiency that is suitable for you. That will help you avoid a lot of the slick marketing that is going around these days as everything slowly becomes a “passive” index of some sort.
¹ – This was a very bad and probably immature joke about male genitalia. I apologize profusely.
² – Do not be confused here – I am absolutely an advocate of low fee, tax efficient and diversified investing. What I am not an advocate of is the use of the term “passive” which I think is unclear and misleading.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.