What Passive Investing Might Mean for Stock Pickers

Investors are trying to figure out how passive investing strategies might help, or hurt, individual stock picking, according to a recent article in The Wall Street Journal.

The article says that new research is showing “how the rise of passive investing—tracking a basket of securities rather than picking individual ones—is changing the makeup of markets.” Investors are reviewing factors such as the percentage of a stock owned by index funds and the flow of dollars into and out of those funds as they evaluate whether to buy or sell shares. Although the research is new, says WSJ, stock pickers are “paying attention.”

According to Pankaj Patel, head of quantitative research at Tarrytown, New York-based Cirrus Research, “one-way money flows into or out of index funds potentially create opportunities for active managers who, for example, might opt to hold a stock longer than they might otherwise when flows are cresting, or pare back a holding sooner if money is moving out.”

Keefe, Bruyette & Woods analyst Pell Bermingham says, “ETFs aren’t really driving performance, but flows can exacerbate performance.”

The article doesn’t suggest that passive ownership is becoming a major factor, but rather suggests that it is becoming a consideration for stock pickers.