Assuming no transaction costs or management fees, why would an investor choose to invest in a fund tracking the Nikkei 225 over say the S&P500.

If I was quite bullish on Japan, and I made the conscious decision to invest in the Nikkei tracking index, wouldn't this in effect be active management because I am using fundamental analysis to select my portfolio?

Assuming we take the academic consensus that passive > active management, would this decision make sense?

I can understand choosing a fund over another due to liquidity and fund characteristics, but not much else.


1 Answer 1


There's a lot to unpack here.

  1. It is increasingly the case, especially among passive strategies, that transaction costs and management fees are the primary dimension along which funds are differentiated. Ignoring those costs seriously distorts the question.
  2. If you invest dollars in the Nikkei that you might otherwise have invested in the S&P500 because you are "bullish on Japan" then you are speculating. Whether you are engaging in "active management" comes down to how well-researched your position is and how frequently you change your holdings.
  3. There's no "academic consensus" that passive > active. In fact there is evidence that suggests the reason so-called "active management" has historically unperformed the market is that a lot of fund managers are reactionary. They follow the herd or bend to non-market influences such as pressure from terrified stakeholders, which leads to "buy high / sell low" behaviour. There is a middle-ground that is largely passive, but which actively looks for clear irrationality in the market and acts accordingly.
  4. I would argue that "fundamental analysis" is "fundamentally different" when looking at an index rather than individual stocks, and therefore so too is "active management". Remember that the fundamental tenet of portfolio theory is to optimize the tradeoff between risk and return, and so if we're ignoring fees then this balance is the fundamental quantity of concern with an index. There is a sense in which you do not care whether the index holds Nissan; rather, you care whether the index is weighted too heavily in Japanese automakers.

Speaking personally, if I was passively riding S&P500 coverage I might contemplate jumping to the Nikkei if I saw geopolitical reasons to do so, e.g., America fully walls itself off from global trade while Japan signs key deals with Canada, UK and the EU and the markets have failed to price this reality in. Unlikely to happen, but if it did, it would be a clear reason to move that doesn't require fundamental analysis at all.


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