The Passive Investing Pandora’s Box

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As passive investing has become increasingly popular, the number of indices that track stocks has exploded. More portfolios are being built to track a wider range of exotic indices. But do investors really know what they’re getting?

Passive Investing

Passive Investing

In just six years, the number of equity indices tracking global markets has multiplied by 25 times (Display, left). New benchmarks are being created to track traditional markets and styles as well as increasingly narrow market segments from cybersecurity to robotics and even aging populations. Today, there are more indices for investors to choose from than there are stocks on the US market.

Strategic-beta portfolios, designed to provide passive exposure to an index, have also proliferated (Display, right). They’re cheap and simple, yet we believe these exchange-traded funds (ETFs) aren’t fully understood. According to our research, low-volatility passive portfolios are often vulnerable to swings in market momentum. And ETFs focused on high-dividend-yield stocks such as utilities or real estate might unwittingly expose an investor to sharp moves in interest rates. So in fact, an investor might have a very active position in what is meant to be a passive allocation. That’s why it’s important to ask the right questions about strategic beta—and make sure your passive portfolio isn’t a Pandora’s box.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Article by Scott Krauthamer, Nelson Yu – Alliance Bernstein

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