Passive investing: Dimensional Fund Advisors warns about pitfalls of ETFs and indexing

Passive investing: Dimensional Fund Advisors warns about pitfalls of ETFs and indexing

According to a report from www.presseportal.de, the volume invested in exchange traded funds (ETFs) worldwide reached a record level in 2023. However, Thomas Meinke, investment director at Dimensional's Germany branch, warns that purely passive investments and their indices do not always meet investors' expectations and needs. There seem to be hardly any limits to the imagination when it comes to index composition. There are now many millions of stock and bond indices worldwide, which is excessive compared to the number of listed companies.

Meinke provides an example of potentially problematic indices with the Russell 2000, in which methodological adjustments had to be made in order to serve the increasing number of index trackers. This may result in stylistic variations that may impact expected returns. Asset management firm Dimensional Fund Advisors therefore recommends a passive approach with active implementation that focuses on broad diversification and low costs, rather than following indices whose usefulness is questionable.

The impact of these developments on the market could lead to increased demand for the active implementation of passive investment solutions in the long term, as investors look for alternative investment options that better suit their individual needs. This could result in investment companies having to increasingly focus on specific financial services to meet investors' needs.

However, since no investment approach is without risks, investors should be aware that capital investments always involve risks that cannot be foreseen. It is therefore important that investors make well-informed decisions and are aware of the complexities of the market. In fact, the increasing variety of passive investment products could lead to even more complex markets in which it is more difficult to protect the overarching interests of market regulation and investor protection.