According to a study by NYU professor Jeffrey Wugler, the growth of indexing is not just a reflection of the attitude that active managers can’t consistently beat an index, it may actually be contributing to it.
One-third of the U.S. equity market is in passive strategies due to the popularity of ETFs, up from the teens; some experts are predicting that passive strategies' market share could grow to 50%; and big institutional investors like CalPERS are considering going all passive — all evidence that the market has fundamentally changed, Wugler suggests.
Though it’s inconceivable that that the entire market will go passive, it seems that the conventional wisdom is that indexing is the smart and safe way to go. But when everyone agrees, someone is missing something. Writing in AdvisorOne, Marshall Jaffe, managing partner of Jaffe Asset Management in Beverly Hills, opines: “By choosing to index, they are, in effect, saying that attributes like intelligence, experience, expertise, wisdom, intuition, patience and discernment — which we all prize as guides for every other aspect of our lives — don’t apply to investing … Investors who are attracted to indexing because it avoids the risks of human judgment should reflect for a moment that it also avoids the benefits.”
