It’s Time to Rethink Index Funds. They Could Be More Active Than Investors Think.
Do you invest in index funds because you want a passive, low-cost approach to investing? If so, you may want to take a closer look at your index fund. The indices these funds track sometimes make arbitrary decisions that look more active than passive. That can leave money on the table.
For many investors, choosing a fund that simply tracks an index may sound like an easy way to get broad, passive exposure to a market or asset class. But not all indices are created equal. In a recent paper, “Indices Acting Active: Index Decisions May Be More Active than You Think,” Dimensional looked at the active decisions that go into the design and management of indices. The takeaway for investors? Think carefully about whether decisions by index providers align with your financial objectives.
Here are three questions index fund investors should ask.