Thread by @borrowed_ideas

1/6 Thread: The active nature of Passive benchmarks

When we think about "passive" benchmarks, we imagine a benchmark consisting of companies locked in inertia.

While the weights change depending on price movement, but companies don't change much, right?

Let's find out.

2/6 @ChrisBloomstran wrote on this topic in his 2018 client letter.

From 1966 to 2005, the avg number of companies turnover in Russell 2000 was 495.

From 2006 to 2017, this number came down to 258 following some changes in rules.

The year 2000 saw the highest turnover: 50%!!

3/6 Those stats make Russell 2000 look like some Schumpeterian construct rather than anything passive.

How about S&P 500?

$SPY does look much more "passive" compared to Russell 2000.

The avg turnover is only ~5% or 23 companies/yr since 1963.

4/6 While 2000 saw 56 companies kicked out of $SPY, the highest turnover year for $SPY was 1976 when they decided to include Financials.

While ~5% turnover appears somewhat passive, it still pales in comparison with Chuck Akre's ~3% avg turnover.

5/6 Of course, Akre is more of an exception than norm, but it still begs the question how we can possibly consider Akre an active investor while tagging Russell 2000 a passive index.

I think a fund's turnover itself should have some bearing on how we think active vs passive.

6/6 I usually insert an adverb while thinking about active vs passive.

Actively Active (L/S funds)
Actively Passive (Russell 2000)
Passively Active (Buffett, Akre etc.)
Passively Passive (S&P 500)