The Hidden Costs of Passive Investing
Academic finance has uncovered powerful insights, from the efficient-market hypothesis to the Fama-French five-factor model. Unlike proprietary trading algorithms, these breakthroughs are published openly and accessible to anyone willing to dive into the research. But, as David Booth, chairman of Dimensional Fund Advisors, has emphasized: Insights aren’t enough. The real advantage comes from turning research into investable, low-cost strategies that can withstand real-world frictions. In other words, the hard part isn’t the theory—it’s the implementation.
Most investors are aware of the implementation costs that create hurdles for active managers versus passive investing, including higher management fees and greater turnover that…
