TY - JOUR T1 - How Investors Use Passive for Active JF - The Journal of Beta Investment Strategies SP - 41 LP - 55 DO - 10.3905/jbis.2022.13.1.041 VL - 13 IS - 1 AU - Jan-Carl Plagge AU - Haifeng Wang AU - James J. Rowley, Jr. Y1 - 2022/03/09 UR - https://pm-research.com/content/13/1/41.abstract N2 - Index mutual funds and ETFs have seen significant asset inflows over the past decades. What is often overlooked about index fund investing, however, is that investors use these products to build active exposures in aggregate. To empirically explore this conclusion, we analyze the characteristics of the asset-weighted aggregate portfolio of US domiciled US equity index mutual funds and exchange-traded funds whose goal is to track an index other than a total US market index. Our results suggest that this portfolio of index funds is active in nature. This conclusion rests on (1) the non-trivial variability of excess returns relative to the total US equity market, (2) statistically significant style factor exposures, and (3) industry-level asset weights that are not market capitalization proportional to the total US equity market. In other words, index fund investing should not be considered equivalent to passive investing. ER -