“It’s the greatest comeback since Lazarus.” – Sid Waddell

They love passive investment strategies in 2017. They hate them in March 2009.

There is no question that the stats back up the idea that passive strategies have more often than not beaten active ones. The reason relates primarily to fees, whereby passive vehicles tend to be cheaper than active ones. But the discussion and referencing of these stats is misleading. Just because a mutual fund or ETF claims to be active doesn’t mean it actually is. Most mutual funds are in reality closet indexers that don’t take large bets. Hard to argue that those strategies are then active, so of course passive wins out.

Nevermind this nuance however. An interesting stat from Goldman Sachs Global Investment Research shows that “passive investing accounts for nearly 40% of total equity AUM, more than twice the level in 2005.”

This makes sense in the context of both performance chasing and the pure beta driven environment over the last few years. Passive, cheap ETFs have dominated asset flows. But the fact that so much money has run into these vehicles is likely a red flag on the style (and make no mistake that passive investing is indeed a style). There likely is going to be a juncture where, as with all investment styles, underperformance for several years occurs.

Am I saying passive is dead if indeed we are in a style bubble? No, but the love of passive at some point likely means active anomalies return in markets. Why? Because if so much money is going passive, there are fewer dollars chasing active opportunities. This in turn makes those opportunities ever more profitable and large enough in time that those who pursue strategies which track them finally begin to generate alpha. I suspect we are near this point across the entire investable landscape.

Passive strategies aren’t dead. And neither are active. There is a cycle to everything, and the cycle for pure beta may finally have reached its end.