Index funds and structured passive asset-class funds are similar in the way that rectangles and squares are similar. All squares are rectangles, but not all rectangles are squares. Comparatively, while all index funds are passively managed, not all passively managed structured asset-class funds attempt to replicate the returns of popular retail indexes, like the S&P 500 or the Russell 2000.
Instead, such nonindex passive funds tend to use academic definitions of asset classes to structure portfolios for the purpose of minimizing the weaknesses of indexing. Those weaknesses, which result from the desire to mitigate what is called “tracking error” (returns that deviate from the return of the benchmark index), include:
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