Passive investments in equity funds outperform active strategies for the first time
As the popularity of exchange-traded funds continues to grow, passively managed index fund strategies have for the first time overtaken the dominance of actively managed funds in the US stock market.
According to data from the Investment Company Institute, passive funds accounted for 16% of US market capitalization at the end of 2021, compared to 14% for active mutual funds, the Financial Times reported.
By comparison, active funds held 20% of US market capitalization in 2012, compared to 8% for passive funds.
Investor habits have changed over the past decade, with a steady cumulative net flow of over $2 trillion from actively managed domestic equity funds to passive fund strategies, including cheap ETFs, efficient and indexical. Many are disappointed with the underperformance of actively managed fund strategies in addition to the higher management fees associated with the investments.
“This is the last step to take. [to index funds]. It’s been a slow build for decades now,” Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, told the Financial Times. “It raises questions about what the endgame is. Liabilities are effective only to the extent that active market participants do so. We probably have a long way to go before the passive becomes less effective, but it raises questions about the balance to be struck.
Actively managed domestic equity mutual funds have suffered net outflows every year since 2005, while their passive counterparts have attracted inflows every year except 2020 and 2021.
Additionally, index ETFs have quickly become a go-to choice for many investors. U.S.-listed ETFs, many of which passively track an index, have seen their assets quintuple to $7.2 trillion since 2012. Assets have doubled to $935 billion from $501 billion in 2020.
The current market environment may continue to favor the passive index style.
“If anything, every sale accelerates the rotation into the liability. Investors sell actively managed funds first, while ETFs and index funds benefit from the mechanical demand for target date funds,” Vincent Deluard, global macro strategist at StoneX, told FT. “By default, all US savings are now invested in TDFs and transferred to index funds.”
“I expect the current bear market to be very severe and characterized by capital outflows from ETFs and index funds, but it will be much worse for the active sector. When the passive sector sneezes, the active sector gets pneumonia,” Deluard added.
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