Newsletter #7: Who’s Really Active in Passive?

Key Insight:

The passive revolution promised simplicity, objectivity, and low costs. But it quietly outsourced critical investment decisions to a handful of benchmark committees and asset allocators—who are very much active.

Passive Still Makes Active Choices

Most investors think of passive as an automatic, rules-based machine. But every passive strategy begins with an active decision: which index to track. The S&P 500 is selected by a committee at S&P Dow Jones Indices, not by a pure formula.

In fact, companies like Tesla weren’t added until after their meteoric rise—even though they were eligible earlier. That’s an active judgment call.

All Allocation Is Active

Even if your portfolio is 100% passive funds, the way you allocate among them—60/40, 80/20, global vs. U.S., large vs. small—requires an active thesis. Vanguard doesn’t tell you what to do with your capital. You’re the portfolio manager, whether you like it or not.

Indices Have Embedded Biases

The S&P 500 favors large, established companies with a long profitability track record. That means newer disruptors, turnarounds, or deeply undervalued companies often don’t make it into the index—until after the upside has played out.

Indexes also ignore price entirely. Whether a stock trades at 10x or 100x earnings, the weight is driven by market cap. That’s not discipline—it’s momentum in disguise.

A Few Firms Now Drive the Market

With trillions in AUM, BlackRock, Vanguard, and State Street now own huge stakes in nearly every large U.S. company. These 'passive' firms vote on shareholder issues, influence corporate governance, and increasingly shape market flows.

Far from being invisible, passive investors have become some of the most powerful players in global markets.

Takeaway

Passive investing is an excellent tool—but not a default answer. Every index has a point of view. Every allocation reflects a belief. If you want true objectivity, it starts with acknowledging that 'passive' isn’t as passive as it seems.