INVESTING
|
PEER-REVIEWED RESEARCH
RECIPE FOR SUCCESS
Should You Invest In Index Funds Or Active Funds? • Index funds are considered passive because they try to
match a predetermined set of stocks rather than beat the market. • The popularity of index funds has exploded over the past 20 years, creating a rich subject for scholars and commentators. • Risk-averse investors should lean toward index funds. In fact, a randomly chosen index fund performs better than a randomly chosen active fund after accounting for risk. Based on research by Alan David Crane and Kevin Crotty.
It’s easy to assume that investing, like cooking, requires skill to get the right mix of ingredients. But that’s not the case with index funds. Effort goes into building them, but these ready-made investments need minimal intervention. Yet the outcomes are appetizing indeed. In the past few decades, use of index funds has exploded. So have media coverage and advertisements questioning if they can truly compete with active funds. A recent study by Alan Crane and Kevin Crotty, professors at the business school, provides a resounding “yes.” These humble investment recipes, it turns out, are richer than they might seem. Index funds track benchmark stock indexes, from the familiar Dow Jones Industrial Average to the widely followed Standard & Poor’s 500. Like viewers following a cooking show, index fund managers buy stocks in the same companies and same proportions as those listed in a stock index. The best-known indices are traditionally based on the size of the companies.
24 RICE BUSINESS
