Are Passive Funds Really Superior Investments : An Investor Perspective

A number of papers have demonstrated that over historical periods, a specified set of factors have outperformed actively managed funds. However, in almost all cases, the factors employed or the procedures followed are not replicable by tradable passive investments. In addition, tradable passive investments have expense ratios which almost always cause them to underperform indexes. The purpose of this paper is to find a small set of exchange traded funds which capture most of the variation in the population of potential indexes and to see if a combination of this small set of exchange traded funds can be identified which outperform active mutual funds in future periods