Smart finance ppl - if passive index investing is reaching bubble territory, will we start to see ETF tracking error go up substantially (like below paper argues) and is this now a viable strategy for active managers?
@profplum99
@ttmygh
@BenKizemchuk
https://poseidon01.ssrn.com/delivery.php?ID=380124069122108085081011071123073081059089022064027023064107067125083029119005005123033062000029047123108124064064093116004019058071007053078070064083068007103064030038014010096097072115126067017118025079087116101092100121071098118124105067003067091122&EXT=pdf …
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This is just a restatement of the work of Lasse Pedersen at AQR. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849071 …. The issue with both papers is they fail to consider a world where active is redeemed and passive is continually allocated. They both assume steady state.
Thanks for the color - with many warning of market inefficiency if passive gets too big, im trying to visualize how active (and even retail) investors can take advantage of it.
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Said another way - what’s the catalyst that ends the passive index bubble? If one exists?
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