Index Investing Isn’t Passive Investing

I’ve discussed this in the past. People tend to use the terms “index investing” and “passive investing” interchangeably. They’re not the same. It might be passive for you to invest in an index fund, but it’s also passive for you to invest in a non-index fund. The index fund itself is not passive, because indexes are constructed by people, and those people make changes in the index regularly. Some make changes on a schedule. Others have different triggers for the changes.

This article lays out five ways that index investing isn’t passive investing.

All of these so-called passive products are also being used very actively. Let’s start with ETFs, which traded approximately $20 trillion worth of shares last year even though they only have $2.5 trillion in assets. That’s 800 percent asset turnover, which is about three times more than stocks. Arguably, ETF usage is active investing on steroids.

But what about investors who use ETFs and index funds long-term and don’t trade? They, too, are using them actively via asset allocation.