General review of the literature:
in this section you should describe the general discipline or field in which
your study will be located with your reasons for choosing this field.
predominant investment strategy today is active investing, which attempts to
outperform the market. The goal of active management is to beat a particular
benchmark. Passive management, or indexing, is an investment management
approach based on investing in exactly the same securities, and in the same
proportions. Portfolio managers do not make decisions about which securities to
buy and sell; the managers merely follow the same methodology of constructing a
portfolio as the index uses. The managers’ goal is to replicate the performance
of an index as closely as possible.
The main advantage
of active management is the possibility that the managers will be able to
outperform the index due to their skills and ability to make informed
investment decisions based on their experience, insights, knowledge and ability
to identify opportunities that can translate into superior performance. A
disadvantage is that active investing is costlier,
because of higher fees and operating expenses. Higher fees are a significant hurdle
to consistent outperforming over the long period. As any other, active
management can also have unfavorable results.
The main advantage
of passive investing is that it closely matches the performance of the index.
Passive investing requires little decision-making by the manager. The manager
tries to duplicate the chosen index, by tracking it as efficiently as possible.
This is an advantage for investors who prefer to buy and hold or prefer to
manage their investment themselves.
A debate between
Passive or Active Management of the Exchange Traded Funds (ETFs) lasts already for
decades. The costless passive management argument is mostly backed by the
universities and research centers. On the other side, asset managers with their
interest in the management fees tend to endorse the opposite side of the
dispute. Each side is able to provide strong logical cases to support their
arguments, although in many occasions the support is due to different beliefs
and personal choices, like those of the preference of McDonalds vs BurgerKing,
of IOS vs Android or of Coca-Cola vs Pepsi. Both approaches have advantages and
disadvantages for our consideration.
reasons are, whether it is costlessness, tax efficiency, or performance, but passive
investments continue to gain new money as traditional actively managed exchange
traded funds watch money slipping through their fingers.
According to the IOSCO
and Central Bank of Ireland officials, ETFs may become a reason of the next
global financial crisis; the academic literature, however, is rather focused on
the advantages of the ETF investing rather than on the threats they may possess
in the future.
Specific review of the literature:
You need to elaborate on what makes your proposal an original piece of work, as
research degrees should contain an original piece of research.
the long term, passive ETF investments performed better, according to the data
provided by … and only in 2017 active investments outperformed passive ones. According
to …, that extra return earned by superiorly performing active managers is
eaten up by their commissions. So, why should we pay more, people thought and
moved their money to invest in those funds that are passively-managed,
attracted by their costlessness and reputation of historically good performance.
However, passive investors moved funds out the professionals’ (active
managers’) hands and currently trying blind replication of the specific market
without considering the possibility of its failure, while active managers are
trying to outperform the market, which may be safer during the financial
crisis. I am going to expand existing research and
debate between active vs passive investments by exploring market structure
issues that arise with the shift from active to passive management of the ETFs.
& Gruber (1993) examined performance of bond mutual funds. Their
methodology involved a time-series regression model using the funds’ excess
returns, selected benchmark indices and a risk-free asset. The results show a
strong trend of funds underperforming the corresponding indices. The inability
of active managers to “beat the market” is connected with the increased
expenses incurred: the underperformance value is approximately identical to the
management fees (that shows funds’ performance almost at the level of the
market – before the commission is to be charged). Their results also show that low-skilled
forecasting investors should be choosing low-expense funds due to the negative connection
between increase in management fee and returns.
The proposed research will be conducted
with a mix of techniques, combining both quantitative and qualitative approaches:
• Quantitative: data analysis on outflows to
passively managed ETFs from actively managed ones.
• Qualitative: interviews and case
Literature review to
examine the existing research on debates between advantages and disadvantages
of passive and active ETF investments emerging from the previous studies, which
will help to shape this paper.
Interviews with IOSCO
former/current Secretary General and Research Department will help to explore concerns
of the regulators about increasing popularity of the ETFs. The interviews will
be noted and recorded, and later transcribed (Lyons and Doueck, 2010) to allow
an accurate interpretation of participants’ comments.
Collection and analysis
of the data on funds’ movement from actively to passively managed ETFs.
Case studies from
securities commissions to find out whether choosing between active or passive
investment is right and to what market structure problems the funds’ outflow
from active to passive management may lead (Adams et. al 2007).