A number of papers have demonstrated that over historical periods, a specified set of
factors has outperformed actively managed funds. In almost all cases, however, the factors
used or the procedures followed are not replicable by tradable passive investments. In
addition, tradable passive investments have expense ratios that almost always cause them
to underperform indexes. The purposes of this article are to identify a small set of
exchange-traded funds that captures most of the variation in the population of potential
indexes and to determine whether a combination of exchange-traded funds from this small
set can be identified that outperforms active mutual funds in future periods.
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Financial Analysts Journal
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