Passive Portfolio Management Strategies Passive Investing: Alternatives Index MFs Tax inefficient; liquidity needs; low returns for index tracking Cannot be shorted or margined ETFs Tax efficient; low portfolio turnovers Can be shorted or margined Futures on Index Index Swaps Creating Passive Exposure Full replication All stocks in their relative weights all the time Cash drag; admin charges; transaction costs; illiquidity reduces returns Stratified (representative)sampling Few stocks chosen using some comprehensive representative dimensions; size, industry, P/E Optimization Minimization of tracking error Correlation b/w factors can be considered Index Weighing Schemes Price-weighted index (Dow Jones IA; Nikkei) Investors hold one share in each stock Adjustment required for corporate actions such as stock splits Biased towards higher priced stocks Market-Cap (Value) weighted index (NIFTY; S&P 500; DAX) Investors hold each stock as per its relative weight in the index Automatic adjustment for corporate actions such as stock splits Free-float adjustments Biased towards higher market cap (size) firms Equally weighted index (VL composite average) Investor maintains an equal investment amount in each stock Frequent rebalancing required Biased towards small-cap (size) firms