Houston Voices

Rice University research finds how index funds can be a good investment opportunity for the risk adverse

Investors might be drawn to active fund investing, but index funds might be less risky, according to Rice University researchers. Getty Images

It's easy to assume that investing, like cooking, requires skill to get the right mix of ingredients. But that's not the case with index funds. Effort goes into building them, but these ready-made investments need minimal intervention. Yet the outcomes are appetizing indeed.

In the past few decades, use of index funds has exploded. So have media coverage and advertisements questioning if they can truly compete with active funds. A recent study by Alan Crane and Kevin Crotty, professors at the business school, provides a resounding "yes." These humble investment recipes, it turns out, are richer than they might seem.

Index funds track benchmark stock indexes, from the familiar Dow Jones Industrial Average to the widely followed Standard & Poor's 500. Like viewers following a cooking show, index fund managers buy stocks in the same companies and same proportions as those listed in a stock index. The best-known indices are traditionally based on the size of the companies.

The idea is that the index fund's returns will match those of its model. An S&P 500 index fund, for example, includes stocks in the same 500 major companies included in the Standard & Poor index, ranging from Apple to Whole Foods.

Index funds are part of the broad range of investment products called mutual funds. Like cooks making a stew, mutual fund managers add shares of various stocks into one single concoction, inviting investors to buy portions of the whole mixture.

While some mutual funds are active, meaning professional managers regularly buy and sell their assets, index funds are passive. Their managers theoretically just need to keep an eye on any changes in the index they're copying. Not surprisingly, active index funds tend to charge more than passive ones.

Curiously, not all index funds perform at the same level. So what should that mean for investors? To study these variations and their implications, Crane and Crotty expanded on past research about skill and index fund management, analyzing the full cross section of funds.

This wasn't possible to do until fairly recently: there simply weren't enough index funds to study. The first index fund, which tracked the S&P 500, was developed by Vanguard in the 1970s. To do their research, the Rice Business scholars looked at performance information for both index and active funds, starting their sample in 1995 with 29 index funds. The sample expanded to include a total of 240 index funds, all at least two years old with at least $5 million in assets, mostly invested in common stocks. They also analyzed 1,913 actively managed funds.

Using several statistical models, Crane and Cotty found that outperformance in index-fund returns was greater than it would be by chance. The discovery suggests that passive funds, although they require little skill to run, have almost as much upside as active funds.

In fact, the professors found, the best index funds perform surprisingly closely to the best active funds, but at a lower cost to the investor. The worst active funds perform far worse than the worst index funds–even before management fees.

The findings topple the conventional wisdom that only actively managed funds stand a chance of beating the market. While active-fund managers often measure their success against that of passive funds, the data show investors who are risk averse would do better to choose passive funds over more expensive active ones.

More adventurous investors, of course, will always be tempted by what's cooking in actively managed funds. But overall, investing in plain index funds is as good a meal at a lower price.

------

This story originally ran on Rice Business Wisdom.

Alan D. Crane and Kevin Crotty are associate professors of finance at the Jones Graduate School of Business at Rice University.

Trending News

Building Houston

 
 

Check out these conferences, pitch competitions, networking, and more in the month of June. Photo via Getty Images

It's time to look at what's on the agenda for June for Houston innovators — from pitch competitions to networking events.

Here's a roundup of events not to miss this month. Mark your calendars and register accordingly.

Note: This post might be updated to add more events.


June 2 — Boost Your Brand's Online Visibility with a Book

Discover the untapped potential of self-publishing a book to establish your expertise, increase your visibility, and build your network. If you have ever considered publishing a book someday, this event is for you.

The event is Friday, June 2, from 8:30 to 10:30 am, at Impact HUB (Amegy Building - 1801 Main St 10th floor.) Click here to register.

June 2 — Best AI Tools for Business Innovation and Growth

This informative workshop is aimed at introducing participants to the latest AI tools available for businesses to innovate and grow. The interactive sessions will provide practical insights and expert advice from speakers who are experts in the field of AI. Participants will learn about the various AI tools that can be used for businesses, including machine learning, natural language processing, computer vision, and more.

The event is Friday, June 2, from 10 to 11 am, online. Click here to register.

June 7-9 — The Future of Global Energy Conference

To highlight Houston's role in the global energy transition, the Greater Houston Partnership, Houston Energy Transition Initiative, and Center for Houston's Future will host a dynamic three-day conference focusing on the role community engagement, innovation and technology, workforce, and funding play in implementing Houston's energy transition strategy.

The event is Wednesday, June 7, to Friday, June 9. The event is hybrid at various locations in Houston. Click here to register.

June 8 — Out in Tech Houston | Monthly Mixer

Out in Tech provides an inclusive networking space for LGBTQ+ people and allies working in tech. Join this relaxed, social-mixer event, hosted on the second Thursday of every month.

The event is Thursday, June 8, at 6:30 to 8:30 pm at Avant Garden. Click here to register.

June 9 — The Future of Global Energy Conference: Luncheon

The Future of Global Energy conference concludes with a gathering of experts and thought leaders, exploring the roadmap for Houston to lead the transition to an energy-abundant, low-carbon future. Panelists include:

  • Jim Gable, President, Chevron Technology Ventures
  • John Hall, President & CEO, Houston Advanced Research Center (HARC)
  • Dr. Ramanan Krishnamoorti, Chief Energy Officer, University of Houston
  • MODERATOR: Jane Stricker, Senior Vice President, Energy Transition & Executive Director, Houston Energy Transition Initiative, Greater Houston Partnership

The event is Friday, June 9, from 10 am to 3 pm, at Hilton Americas. Click here to register.

June 9-10 — Mission Innovate - Reimagining Space Technology to Solve Today’s Challenges

This summer, innovators from around the greater Houston area will convene for a two-day event to innovate, disrupt, and help design innovative solutions that can address gaps in numerous key areas. Entrepreneurs will work with licensable intellectual property from NASA’s IP portfolio to solve some of the largest problems facing the industry. Experienced and first-time founders will form teams, ideate, and pitch their ideas to renown technology entrepreneurs, including members of the innovation teams at NASA. As part of the event, teams will be taught critical startup methodologies, advised by experienced business leaders, and network with an entire community that dreams of shaping key areas in emerging technology.

The event is Thursday, June 9, to Friday, June 10, at the Cannon West Houston. Click here to register.

June 12-14 — Energy Drone & Robotics Summit

The most influential gathering of over 1,500 industrial, energy, and engineering leaders from around the globe where the key challenges and solutions are addressed for operating robotics, drones, satellites, and remote systems successfully and managing AI/data, from the stars to the sea floor.

The event is Monday, June 12, to Wednesday, June 14, at Woodlands Waterway Marriott & Convention Center. Click here to register.

June 13 — Investor Studio Series: VC Due Diligence Best Practices

During this event, Golden Section, a venture capital fund and founders studio obsessed with B2B SaaS product development, will discuss how VCs approach investing and conduct due diligence, and why this matters for founders. The presentation will cover:

  • Market changes that effect how VCs approach investing
  • What founders need to prepare for this new environment
  • How Golden Section approaches due diligence

The event is Tuesday, June 13, from 4 to 6 pm, at the Ion. Click here to register.

June 13 — Using ChatGPT to Grow Your Business

Learn how to harness the power of artificial intelligence and use ChatGPT to not only stay ahead of the game but to redefine it. Whether it's handling queries, managing customer relationships, or generating leads, AI can automate and enhance many aspects of your work. This session will guide attendees through the fascinating world of AI and show them how to leverage it for maximum results.

The event is Tuesday, June 13, from 11 am to 1 pm, at Amcap Mortgage. Click here to register.

June 15 — Female Founders and Funders Meetup

Monthly, every third Thursday, Softeq Venture Studio and Sesh Coworking invite all rockstar female founders and funders in the Houston area to network and empower each other.

The event is Thursday, June 15, from 9 to 10 am, at Sesh Coworking. Click here to register.

June 20 — Co-Creating the Future: An African Startup Symposium on Collaboration

This physical symposium explores opportunities for cross-border entrepreneurial collaboration between the US/Houston and Africa. From Idea to Impact, delving into the African startup ecosystem, highlighting growth and potential for cross-border collaboration, key sectors driving innovation and growth, and legal, regulatory, and cultural considerations and challenges for cross-border collaborations. Startups and investment opportunities will be showcased.

The Agenda:

6:00 pm - 6:10 pm - Introduction to the event and The Beta Collective
6:15 pm - 6:20 pm - Sponsors Highlight
6:20 pm - 6:35 pm - Startup showcase
6:35 pm - 6:40 pm - Panel Introduction
6:40 pm- 7:30 pm - Panel
7:30 - 7:50 pm - Q&A
7:50 - 8:00 pm- Closing and Thanks
8:00 - 8:30 pm - Strategic Networking

The event is Tuesday, June 20, from 6 to 8:30 pm, at The Ion. Click to register.

June 22 — Ultrasound. Integrated. Everywhere.

Pump & Pipes is hosting an event focused on thin-film ultrasound technologies from energy applications into aerospace, health, and medtech sectors.

In collaboration with NASA Tech Talks, and the Mingle Monday Health & MedTech series at The Ion, join Pumps & Pipes as they venture into a discussion on the use of ultrasound technologies from both terrestrial and space medicine perspectives.

The event is Thursday, June 22, from 6 to 9 pm, at the Ion. Click here to register.

June 28 — June Transition On Tap

Transition On Tap is Greentown Labs' monthly networking event devoted to fostering conversations and connections among the climate and energy transition ecosystem in Houston and beyond. Entrepreneurs, investors, students, and friends of climatetech are invited to attend, meet colleagues, discuss solutions, and engage with our growing community. If you’re looking for a job in climatetech or energy, trying to expand your network, or perhaps thinking about starting your own energy-related company, this is the event for you.

The event is Wednesday, June 28, from 5:30 to 7:30 pm, at the Ion. Click here to register.

Trending News