Question

If the Fed normalizes its monetary policy, passive mutual funds will continue outperform actively managed accounts?

Answer 1

Yes , passive mutual funds will continue outperform actively managed accounts even if the Fed normalizes its monetary policy because the portfolio is designed to parallel the returns of a particular market index or benchmark as closely as possible. For example, each stock listed on an index is weighted. That is, it represents a percentage of the index that is commensurate with its size and influence in the real world. The creator of an index portfolio will use the same weights. The purpose of passive portfolio management is to generate a return that is the same as the chosen index. A passive strategy does not have a management team making investment decisions and can be structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust. Index funds are branded as passively managed rather than unmanaged because each has a portfolio manager who is in charge of replicating the index. Because this investment strategy is not proactive, the management fees assessed on passive portfolios or funds are often far lower than active management strategies.

Passive mutual funds are easy to understand and offer a relatively safe approach to investing in broad segments of the market.