Apr 29, 2021 - Economy

The highs and lows of passive investing

a magnifying glass over cash

Illustration: Rebecca Zisser/Axios

Passive investing is an area where being overly purist can be self-defeating.

Why it matters: While there's abundant evidence that a hands-0ff approach will nearly always outperform a hands-on approach over the long term, no one really feels safe or in control when their hands are entirely off the wheel.

The big picture: Passive investing can be harder than it looks, especially when you need to reinvest dividends in a way that dynamically rebalances the portfolio. That's why vehicles like target-date funds and robo-advisors were invented.

  • The catch: Passive investment strategies can sometimes sit uncomfortably with a commitment to sustainability or other ESG screens. And selling existing assets in order to invest them passively can trigger capital gains taxes.

Driving the news: One robo-adviser, Wealthfront, is starting to allow its customers to make their own investing decisions. They can buy or transfer over ETFs and will even be able to add crypto to their portfolios.

  • Wealthfront knows that its customers don't have all of their assets on its platform, so this is a way of increasing assets under management — and including them in the Wealthfront robot's risk and asset-allocation calculations — without forcing everything to be invested according to its model portfolios.
  • Wealthfront CEO Andy Rachleff doesn't expect a lot of customers to rush to take advantage of the new options. Rather, he tells Axios, "it's just knowing that you can."

The bottom line: Active investing is having a moment. By allowing investors to experiment a bit and maybe stray a little from passive-investing orthodoxy, Wealthfront ultimately hopes to keep more of them in the broader fold.

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