Should you follow the dumb money into passive investing?

The popularity of passive investing has had an unforeseen effect on stockmarkets, says Sarah Moore. That's left room for smart investors to profit.

"Fifty years ago, indices were simply averages produced by newspapers and academics using slide rules, to help gauge the general direction of the market," writes John Authers in the Financial Times. Now indexing is a multi-million-pound industry a company such as S&P Dow Jones calculates more than a million indices a day. And the amount of money being invested based on these indices is having an increasing impact on market behaviour, reckon some experts.

It's all down to the rise of 'passive' investing. Passive funds aim simply to track an underlying index rather than beat it, as 'active' managers do. They've become popular for two main, related reasons: firstly, despite their stated aims, most active managers fail to beat their index over the long run. Secondly, active managers charge for this underperformance, whereas a passive fund is essentially run by a computer, which is a lot less expensive. So buying a cheap passive fund that will more than likely beat an active manager makes sense to an increasing number of investors.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.