Shiller Is Wrong
By Roger Nusbaum, AdvisorShares ETF Strategist
Robert Shiller had an interesting interview on CNBC in which he took the concept of passive investing to the woodshed, calling indexers free loaders (on other people’s work) and stopping just short of calling the strategy un-American. I found the clip via Cullen Roche who also had some thoughts on the Shiller segment.
One of Cullen’s major points, that I have made many times as well influenced by him, is that unless you somehow own every stock and bond in the world and then never make a change you are making some sort of active decision. What most indexers do is use passive funds to make in an active manner even if they’re not very active.
As of a couple of years ago the total market cap of US markets was $22 trillion with $4-5 trillion in index funds (traditional funds plus ETFs). To Shiller’s concern in the video, there are still plenty of market participants assessing the merits of individual stocks on an active basis.
A diversified equity portfolio might include the following;
- Large cap
- Small cap
- Foreign developed
- Emerging market
How would you weight those four? Whatever the answer, you’ve made an active decision. How frequently would you rebalance? Whatever the answer, you’ve made an active decision. Similar situation using one total market fund and some other equally broad foreign proxy.
According to ETF.com there are 58 ETFs focused on technology totaling about $70 billion. They all appear to be index funds or smart beta funds, but any use of these funds would clearly be part of an active strategy. Ditto any other sector funds or funds that are narrower than sectors. While someone might pushback on me that there is no passive strategy that uses tech sectors funds, what would be the passive use of a Chinese internet stock ETF be?
Furthermore, if you spend any time on Twitter and have a markets oriented feed then you will see no shortage of traders talking about entering or exiting trades made on or setups for very broad equity proxies, the kind that someone on Bogleheads ™ would own as part of their “passive” strategy. This points to the idea of how blurred the line is between active and passive, pushing back on Shiller even further.
Have you ever seen Jack Bogle interviewed? Have you heard him weigh in on his thoughts about how much foreign equity exposure investors should have? Long story short, he’s not a fan. That’s a very active decision…from the guy who invented the index fund.
For me the takeaway has always been the same which is that the labels don’t matter. ETF, traditional mutual funds, individual issues; anyone building a portfolio is going to choose what they think are the best tools, active/passive, irrespective of the wrapper to build the portfolio they think will best help them meet their objective.
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