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Is It Active or Passive?

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As was widely expected, the Federal Open Market Committee raised interest rates by a quarter point (0.25%). Whenever there is action by the Federal Reserve, bond experts are often turned to for their views on navigating the credit markets. Their insights clearly reflect active investing, but what if an investor were to use their opinions to choose a bond index fund to invest in? Is such behavior active or passive investing? Taking it a step further, what about an index designed to weight bonds based on the characteristics active fund managers seek out, such as interest rate sensitivity and credit quality? Would you consider an exchange-traded fund (ETF) mimicking such an index to be passive or active? (Aye Soe of S&P Dow Jones Indices thinks such “smart beta” ETFs could be launched over the next few years.)

This question about the gray area between active and passive investing was discussed at a CFA Chicago Society event held earlier this week. Much of the conversation focused on factor investing, and its close sibling smart beta. Factor investing involves targeting securities with specific traits such as value, small size or low volatility. Focusing on such traits was previously in the dominion of actively managed funds. The growth of ETFs has lowered the costs of getting specific exposure to these traits.

Most ETFs track indexes. Indexing is considered to be the key part of passive investing. The purest form of indexing is a mutual fund or ETF tracking a broad and well-established index. Examples include the S&P 500 and the Barclays U.S. Aggregate Bond index. Factor and smart beta funds track more specialized indexes. Continue Reading »


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  • Bullish: 32.3%, down 3.2 points
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The Week Ahead

No S&P 500 companies are scheduled to report earnings.

The week’s first economic reports will be May existing home sales, which will be released on Wednesday. Friday will feature the June PMI composite flash and May new home sales.

Seven Federal Reserve officials will make public appearances: New York president William Dudley on Monday and Sunday; Chicago president Charles Evans on Monday; Fed vice chairman Stanley Fischer, Boston president Eric Rosengren and Dallas president Robert Kaplan on Tuesday; and St. Louis president James Bullard and Cleveland president Loretta Mester on Friday.

The Treasury Department will auction $5 billion of 30-year inflation-protected securities (TIPS) on Thursday.


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