Passive Funds Are Just Free-Riding Active FundsPassive Funds Are Just Free-Riding Active Funds
It's not fair.
February 1, 2017
If you and your neighbor have the same income and expenses except that he rides the bus for free every day while you pay a fare, he will be richer than you. Until recently, this was obvious: the neighbor is a free rider while you pay your way.
But now, the obvious is presented by some as a eureka moment. Now, plenty of people are extolling the benefits of free-riding without naming it as such and encouraging a large exodus from active to passive (or indexed) funds (like the SPDR S&P 500 Trust ETF (SPY) or the SPDR S&P MidCap 400 ETF (MDY)). The only problem is that proponents of this form of free-riding neglect to also mention the following corollary sub-plot.
Now your neighbor makes you feel like a fool and convinces you to also ride for free. Soon, your whole town has caught on to the idea and…
