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RP: Hello there. Index funds are a very efficient way to invest. They allow ordinary investors to gain exposure to a large number of securities at very low cost. Passively managed funds have grown in popularity in recent years — so much so, in fact, that some argue we may be heading for an indexing bubble. So, is this something investors should be worried about? Ben Johnson, Director of Passive Funds Research at Morningstar, says not.
BJ: If you look at the growth of passive investing, it’s clear why these concerns have been raised, because passive investing, index funds, exchange-traded funds have been growing at a pace that has far outstripped the growth of traditionally actively managed funds. Now that said these are by definition very low activity managed funds. So the real concern should be, who is doing price
RP: Passive funds are still far less popular than active funds. But that’s changing fast. The
BJ: I would argue that passives can grow a fairly long way. They have a long runway from where they stand today before you might see any real, meaningful effect on price discovery, on capital formation, on the underlying securities prices. I think these fears, with respect to passives effect on the overall market, are quite overblown. I think they are being fanned by frankly those who are threatened by them, whose territory is being encroached upon, which is high cost, high turnover active managers.
RP: That’s all for now. Thank you to Ben Johnson, and to you, for watching. Until next time, goodbye.
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