Active vs. Passive
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Welcome to Cornerstone clips. I’ll be speaking today about active investing versus passive investing. You may hear a debate on this subject that argues passive. Is better or active is better? I would argue that they both make sense in different scenarios and in different situations. We tend to here at Cornerstone, prefer more actively manage mutual funds and ETF.
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The reason for this is we believe our clients are compensating us to try to net of our fees due as well as the average or better. We won’t always accomplish that. There’s good months and bad months and good years and bad years, but we believe our clients are looking for us to try to add some additional value with the resources and skills that we have.
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When using passive investments, you can imagine that they’re going to track some sort of index. They’re not traded as heavily, and so a good example would be the S&P 500. And many people know that index and here on on the news, what it went up or down each day that. Index has many many mutual funds that track it and all they do is keep in line with whatever 500 stocks are in the S&P 500 index.
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Conversely, if you have an active fund manager, they may decide that they’re going to invest in that universe of S&P 500 stocks, but they may try to remove 100 names that they aren’t as excited about and add money to the top 100 that they think are likely to do the best. That’s the theory behind active investing versus passive investing.
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There are some pros and cons both directions, although we prefer active in some spaces, there are are some categories of investing, maybe in bond markets at times, maybe in in dividend payer stocks where an ETF can be very, very good choice and very efficient.
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One of the benefits of the passive style investing is because there’s less activity involved. They’re generally lower costs and active funds, so active funds right off the bat have to make up a little added expense to be worth what you pay for them. But again, we would argue both have their place and we utilize both with clients where it makes sense. Thank you for joining us today. If you have any additional questions, feel free to call us.
