For years, investors looking for broad exposure to a particular asset class or region have been shifting into passive funds, which are cheaper than their active equivalents and, by definition, never underperform. But while making this switch across one’s portfolio may seem logical, there are certain market segments where data show it may not be the best option.
Passive funds simply track indexes like the S&P 500
whereas the holdings of actively managed investments are selected by an individual or team. While active funds have been around for longer — and as such, more assets are held in them — passive funds are increasingly the product of choice for investors; they have seen hundreds of billions of dollars in inflows in recent years, while active funds have seen the same in outflows.
The appeal is partly due to the lower fees that passive funds charge, on average, but investors have also taken to them because they boast stronger long-term performance relative to their active peers.
The performance gap is particularly strong when it comes to a category like large U.S. stocks, which are perhaps the most widely followed securities in the world. Because there are so many traders and…