Performance Attribution for Passive Strategies
Dax Johnson, CFA, CIPM, State Street

Although the debate over the merits of active versus passive management rages on, passive management through index-tracking mutual funds and ETFs in the U.S. equity markets has become the mainstream strategy. Despite the prevalence of passive investing, performance attribution methods remain geared toward the dynamics of active investing; many managers employ manual spreadsheet reporting to augment active-focused performance solutions. Single-factor attribution models don’t address the primary performance drivers that occur within a passive strategy. An effective performance attribution solution can explain excess returns and give greater insight into passive portfolio performance by incorporating several factors to explain excess returns, including: cash drag and futures, trade costs, fair valuation, tax advantage, income and expenses, benchmark impact, NAV rounding, and post-date versus trade-date performance.