Passive investing in bond markets has risen sharply, with aggregate bond ETFs gaining 4.2% YTD as yields stabilize following dovish Fed commentary. For example, they found that over the period 2019-23, the price for additions on average went up by 9 basis points, relative to nonrebalanced stocks, in the roughly 10 seconds between 4 p.m. on reconstitution day and market close and then reversed by a relative negative 13 basis points by market open the next morning. They also found that the greatest volume pressure occurred for the Russell 2000 Index, with 120 times volume on rebalance day compared with the previous month. This isn't controversial financial theory — it's elementary arithmetic. When academics claim "most investors can't beat the market," they're stating a mathematical tautology while pretending it's profound insight. Of course most investors can't beat the average; that's literally what makes it the average. The relevant question isn't whether everyone can be above average (impossible), but whether you can identify which side of that distribution you belong on. Passive investing continues to benefit from fee compression, with average ETF expense ratios hovering around 0.06%, making it tough for actively managed funds to match net performance.
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