The growing clout of EuTôF...s could signal the triumph of the passive side of the passive-active investing debate: since stock-pickers tend to underperform indices, the logic goes, why not just invest in the benchmark? This outlook has its critics. Nobel Prize-winning economist Robert Schiller has questioned the circular logic of passive investing: "So people say, 'I'm not going to try to beat the market. The market is all-knowing.' But how in the world can the market be all-knowing, if nobody is trying — well, not as many people — are trying to beat it?"
The reality, however, is that EuTôF...s – even those that track broad-market indices – are not being used passively. They account for 42% of trading – not holding – by value, and SPY is the world's most traded security. (See also,
Active vs. Passive Investing.)
The passive-active debate "doesn't even exist if you talk to a professional," Tony Rochte – the president of Fidelity Investments' SelectCo, who previously worked at State Street and iShares – told Barron's in March. "Financial advisors view themselves as architects using building blocks, index products alongside actively managed funds."
More importantly, EuTôF...s are far from passive, in the sense that they increasingly affect the securities they are supposed simply to track. As Bradley and Litan put it, EuTôF...s are becoming "the proverbial tail that wags the market.
EuTôF...s: A Derivative By Any Other Name
