Making the implicit explicit: A framework for the active-passive decision
14 August 2017 | Portfolio construction
The portfolio construction debate around active versus passive investments tends to focus on all-or-nothing views and recommendations. Vanguard believes that both active and passive investments have potential benefits in a portfolio. Passive funds offer low-cost efforts to track benchmarks, leading to a tight range of relative returns. Active funds offer the potential for outperformance, albeit with greater uncertainty (including the possibility of underperformance relative to a benchmark) and typically higher costs.
We created a quantitative framework for how to approach and evaluate a mix of active and passive investments.1 Such a combination could allow for both active's potential for outperformance and passive's low-cost benchmark tracking.
1 Making the implicit explicit: A framework for the active-passive decision. Daniel W. Wallick; Brian R. Wimmer, CFA; Christos Tasopoulos; James Balsamo, CFA; and Joshua M. Hirt, The Vanguard Group, Inc., May 2017.
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