Disclaimer: This post is written for educational purposes and does not constitute investment or financial advice.
In today’s post we discuss passive investing, the history, and most importantly, what the future holds and the role of open innovation.
Passive investing involves a longer-term investment strategy that looks to increase returns by minimising active buying and selling on a day-to-day basis. In traditional finance, passive investing is very popular, with 18% of total equity exposure represented by index-type products.
The first index was created on May 1st 1975 by John C Bogle. John founded The Vanguard Group, which today has an aum of $6.2 trillion across all their funds. What’s most interesting is when John C Bogle introduced ‘The Vanguard Group’, it was considered “un-American” due to the nature and structure of the index. People couldn’t see the vision and benefits of an index.
Later in the life cycle of The Vanguard Group, it renamed one of its funds, ‘Vanguard 500 Index Fund’, which tracks the Standard and Poor’s 500 (S&P500). The fund was managing close to $11 million at the time of the name change.
New concepts will always be scrutinised at first. However, now, as mentioned previously, Vanguard has $6.2 trillion in aum and is ‘trusted’ by all. In 2020, the group’s capital comes from asset managers, institutions and governments from all around the world. If you’re an American citizen, you will most likely be an investor in a Vanguard fund, without even knowing.
Passive index investing solves the problem of not knowing which investments are the right ones to choose. This is particularly useful when viewed through the lens of decentralised finance (Defi) or any other crypto asset sector. Chiefly, this is due to the rate of innovation that exists in the crypto landscape. For example, the recent Defi sector expansion brought a slurry of projects to the market of varying quality. It would require a full time commitment to ensure investment into only the best projects whilst avoiding the many scams and contract vulnerabilities.
Continuing with the Defi example, a non-passive approach would have to consider what the top Defi projects will be in five year’s time. Will they be the same projects we see today or will new entrants come to the market? Ultimately, no one knows, and through passive investing institutional or individual investors don’t really need to care either. A PhutureDAO index tracking the ‘Top 10 Defi Projects’ by market cap will guarantee ownership of those top 10 projects in five year’s time; represented with one single token which can be redeemed or exchanged on the open market.
If you, the investor, have a long-term view on decentralised exchanges or believe crypto-insurance will play a bigger role within the crypto space as it continually grows. Then investing into an index product might be the most efficient method of gaining exposure. It provides easy access to sectors without having to purchase all underlying assets individually, and offers exposure to an asset class without requiring deep technical knowledge.
We believe open innovation will take precedents in the development of web 3 applications. Ultimately, we see traditional financial procedures and products that revolve around ‘trust’ in institutions or third parties, being displaced by a Web 3 trustless and collaborative environment. We see the one to many interactions that are commonplace in traditional finance, being replaced by many to many interactions in the next generation of financial infrastructure.
Index investing hasn’t seen a technological update since 1975. The reason why? It works for traditional assets. The question we ask ourselves is, does a traditional index work for the token economy? The answer is no. If you believe that the token economy will be a trillion-dollar asset class, then an index will play an essential role and must be implemented through a new structure and format.
Open innovation means building products that progress through the collaboration of distinct community members. This leverages the knowledge of others to iterate on new features and grow the ecosystem much faster than any single team can. Building products with this mindset is extremely powerful as it will bring in a new age of (d)applications, PhutureDAO being a prime example.
For those who haven’t heard of PhutureDAO, PhutureDAO provides a range of benchmark, programmatic indexes with real underlying assets, auto rebalancing functionality and a non-custodial architecture. PhutureDAO’s closest comparison would be a user first, Vanguard type index provider, built upon a Web 3 foundation. Open for all to build upon.
One of the main questions that we get asked is: “If I were to buy the assets of the index, what are the main differences between a PhutureDAO index and doing it myself?”. In response, we first turn to the fact that PhutureDAO allows a basket of tokens to be purchased via one transaction. This prevents the investor from having to purchase each token individually. Secondly, PhutureDAO indices are programmatic ensuring each index consistently follows the predetermined rules set by the creator. Conversely, human discipline is subject to the emotions of fear and greed which can cause a deviation from the intended strategy. Thirdly, PhutureDAO indices auto-adjust at predetermined intervals and provide constant rebalancing pressure at zero cost to the investor. If you were to do it yourself, it would cost you both time and money to re-balance and adjust your index.
Through our platform we provide the facilities for investing into a range of benchmark indexes. More importantly, we empower you to create your own index that others can invest into, allowing for the creation and dissemination of your own investment strategy.
With this model, indices will always iterate with the fast pace of innovation in the crypto ecosystem ensuring a plethora of investment vehicles. Whilst index creators can benefit from investor interest in the latest crypto segments/sectors. PhutureDAO is the index provider for the token economy built on a Web 3 trustless foundation, open for all to build and create upon. That’s our vision for the future of indexing. ‘Let builders build.’