Words matter.

The reason we are still having the inane active vs. passive debate is due in large part to the awkward framing of the question. A better debate would be over high cost vs low cost investment solutions.

The same issue is playing out with the word ‘index.’ A few months ago I wrote a post about how our understanding of the word ‘index’ has changed from a broad-based measure of the performance of an asset class into pretty much any old method for picking stocks. The best analogy I can think of, is that these ‘indices’ are as different as clothes that are ‘off the rack‘ versus those that are bespoke. They’re both clothes, but different as can be.

For those whose understand the differences, it is not a big deal. However for the broader public it can be confusing. It can even be confusing for professionals. Here’s the rub. No one is forcing anyone to invest in an index fund, of any type. Not only that, fund companies can change the index a fund uses, if it so desires.

Yes, you can argue that if you are participant in a 401(k) plan and the only investment options are index funds, then yes, I suppose you are being forced to invest in an index. For example, the federal government’s TSP comes to mind.

There are plenty of reasons to be skeptical about the proliferation of indices. However it seems counterproductive to try and limit their development. Should index providers be ‘transparent and accountable’? Absolutely, but as I wrote a while back the beauty of ETFs, and by extension the many indices that underlie their strategies, is the many attempts at experimentation and innovation.

Someone will come up with better terms to distinguish between broad based indices and their bespoke cousins. Until then, know what you own.

Update: John Rekenthaler at Morningstar has a good take on the potential risks of self-indexing. See also Ben Johnson talking about the evolving nature of indices.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.

Please see the Terms & Conditions page for a full disclaimer.