There’s a lot to like about index investing. Market-cap-weighted index funds harness the market’s collective wisdom, they tend to enjoy a sizable cost advantage over their active counterparts, and they avoid key-person risk. They’ve put downward pressure on fees across the entire asset-management industry, which has also helped investors in actively managed funds. But not everyone is a fan. Here’s a closer look at some arguments against index funds. Most aren’t compelling.
1 | The market isn’t perfectly efficient, which creates opportunities for active investors.
Market efficiency is the idea that prices reflect all publicly available information. If it’s true, fundamental research shouldn’t help active managers—after adjusting for risk—beat the market. Clearly, the market doesn’t always get prices right. But that doesn’t mean the market is easy to beat. Indeed, most active managers don’t.
