How can one define the appropriate benchmark asset-class in the case of a new drug for a rare disease?

ECONOMIST: Economics focus

While active investment involves an asset manager making investments with the aim of outperforming a benchmark index, passive investment requires an asset manager to replicate the benchmark index by incorporating the constituent assets in similar proportions (weights) and thereby matching the returns of the index.

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Despite being a broader portfolio tracking a more widely followed benchmark, its small asset base provides a shallow market for its shares.

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Overall, an ETF that has a difference between its net asset value and benchmark compared to its expense ratio of 25 to 30 basis points is worthy of caution.

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To do this, take your ETF's net asset value, compare it to its benchmark, and if it's significantly above the expense ratio, look into why that is.

FORBES: How To Find The Best ETFs

The large percentage of outperformance among international small managers may result from a large portion of them holding a different asset class and being compared to the wrong benchmark.

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For one, because they are asset-allocation strategies, it is difficult to choose the proper benchmark to compare them to, he says.

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Andreas Utermann, a director at Mercury Asset Management, thinks a euro index will underperform a broader, pan-European benchmark and should therefore not be marketed as a better alternative to clients.

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