The solution to the active vs. passive debate: Stop arguing!

By John Spence

Active and passive investors have been at each other's throats for decades, but maybe it's time to bury the hatchet.

After all, Don Henley famously said the Eagles would get back together "when hell freezes over," yet the band members made up and are still rocking. Stevie Nicks said there was “more of a chance of an asteroid hitting the Earth” than Fleetwood Mac reuniting with Christine McVie in the lineup, but it's happening.



So maybe there is a ray of hope that active and passive investors can finally set aside their differences and just get along.


Ballyhooed battle

We recently wrote about the ancient active vs. passive investing debate, and why it actually misses the point. As a reminder, passive investors love index funds and ETFs that are designed to mirror the market, while active managers try to beat the market.

"In one corner, we have stock pickers who scoff at index funds that just track the market. In the other corner, we have indexing fans who view most active managers as fools or swindlers," says MarketWatch reporter Victor Reklaitis.

"But maybe the ballyhooed battle between active and passive investing has run its course," he adds. "Aren't we all active investors in some way? Perhaps it's time to move beyond this debate."


A flawed question

Interestingly, some die-hard indexing fans have also been saying the active vs. passive debate is getting a bit passé nowadays.

"I would say definitely that active vs. passive is kind of a flawed question because it's really about cost," says Samuel Lee, who covers ETFs at investment researcher Morningstar. "You don't have to be dogmatic about just owning index funds, and this is coming from someone who loves index funds and has the majority of his assets in them."

The financial crisis and mistrust of Wall Street both probably accelerated the trend to passive investing in recent years.

"Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type," The Wall Street Journal reports. "So far this year through July, investors put a net $177 billion into those passive funds, compared with $74 billion in actively managed funds."