Easy Money
iStockphoto/Andry-Djumantara

Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about passive funds with Chris Koltek, institutional client portfolio specialist with Portfolio Solutions Group. We talked about best asset classes for passive strategies, how to use them in client portfolios, and we started by asking what accounts for their recent popularity.

Chris Koltek (CK): Passive investing has grown significantly over the past few years, and now it’s offered through ETFs, index mutual funds and segregated funds. I think at its core, passive investing offers three key benefits, a low cost, strong diversification and transparency. There’s a lower cost than active strategies, because there’s no active stock picking or research teams needed. They track a broad index like the S&P 500 or the MSCI World. They also provide broad diversification. You can own hundreds of securities across various sectors, geographies and market capitalizations. The diversification helps reduce unsystematic risk, or single company risk. For example, the risk of investing in a single company and that company losing a significant client or getting involved in some kind of a scandal. There’s also a high degree of clarity around what the index fund invests in. You know what they own. They track the index. That simplicity and efficiency make passive strategies a powerful tool for building long term wealth.

Suitable asset classes

CK: Passive strategies work best in efficient, well covered and highly liquid markets, where most of the relevant information is priced in. So strong candidates for passive strategies would be asset classes like U.S. large cap equities, where they can provide low-cost, diversified exposure and core fixed income investments that provide a broad exposure at a low cost. So active investing can provide advantages in areas where local knowledge and market inefficiencies can create opportunities. So, for example, things like emerging market equities. Or markets where credit selection and research can add value, such as high-yield bonds.

How to use them effectively

CK: I think there’s three primary ways investors can use passive strategies when constructing portfolios. As core building blocks; for tactical tilts within their portfolios; or as part of a core satellite approach. As a core building block, they can provide a low cost, efficient way to gain exposure to large liquid markets like U.S. large cap stocks or bonds. Passive funds can also be a great tool to express short or medium term tactical tilts or views quickly, so they can allow investors to lean into a particular region sector or a theme like international equities or technology, quickly and with transparency. In a core satellite approach, an investor could blend both active and passive strategies. The passive strategies can act as a core of the portfolio, while the active managers can be used as a satellite to add alpha or manage specific risks. All of these approaches provide a cost control, transparency, liquidity and precision in asset allocation. You know what you’re going to get into.

How to find the right mix with active investments

CK: Look, there’s no magic formula or correct percent of active and passive or a one-size-fits-all approach. It’s about purpose, not percentages, the purpose and objectives of each client. A strong advisor can help the client articulate their investment goals, the risks and constraints for their portfolios, and put together an approach that makes sense for the individual client. Clients and advisors must look where they believe a manager can add skill and add value, which markets are efficient and where it makes sense to pay for performance or risk management. When every fund in the portfolio, active or passive, has a clear role and earns its place, then you have the right mix for that client. The key takeaway is that passive investing is a tool. It’s not a philosophy. It’s not about being passive in your thinking. In fact, a thoughtful use of passive strategies requires active decisions about where, when and how to apply them.

Passive strategies in the current market environment

CK: Look, we’ve seen a lot of uncertainty, geopolitical shocks and market concentration recently, and that presents opportunities for both passive and active managers. Passive investments can act as a fast tool for repositioning in a market that shifts quickly. Think about early April, for example, when we saw the steep drop in the S&P 500, followed by a strong recovery. But they also come with some important trade offs or risks. Concentration can be an issue, especially in a market like we’re seeing in 2025. Seven companies have made up more than 50% of the gains of the S&P 500 return year in the first half of the year. When a few big companies dominate the index, a passive portfolio can become more fragile than it seems. And in times of stress, those big stocks can fall together, dragging the index down and reducing the benefits of diversification. Passive funds don’t distinguish between cheap or expensive stocks. They simply follow the index, which means they often overweight overvalued companies and underweight undervalued ones.

And finally, what’s the bottom line on passive strategies

CK: Low-cost investing is great, but low cost isn’t the same as low risk. Passive investing strategies can bring real advantages, but they also come with hidden exposures, especially to things like momentum, concentration and valuation risks. So it’s important to look beyond the headline performance. A diversified portfolio that blends passive and active strategies and stays aligned to clients’ long-term goals is still one of the best ways to manage uncertainty and build resilient wealth. And look, I think the narrative for a long time has been, ‘Hey, are you active or are you passive?’ And I think the shift that we’re seeing in the markets now is that passive is becoming a tool. And instead of having to choose between active and passive, people are incorporating both. Passive investing doesn’t necessarily have to be an investment philosophy on its own. You can incorporate active and passive investing into a well-diversified, resilient portfolio.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Chris Koltek of Portfolio Solutions Group. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

**

Go back to the article.