U.S.-equity ETFs show an average expense ratio of 0.40%, whereas the average expense ratio on actively managed mutual funds is 1.34%. Two broad U.S. stock ETFs from Schwab come with expense ratios as low as 0.04% while the cheapest actively managed large-cap fund costs 0.50%. [Asset Flows Show Growing Interest for Low-Cost, Passive ETFs]
Moreover, the number of active managers who beat their benchmarks is declining. Over the past decade, only 38% of large-cap-equtiy managers beat the S&P 500; over the last five years, only 31% beat the index; and over the past three years, just 18% outperformed.
According to Lipper data, 86% of the $4.4 trillion in mutual funds and ETFs a decade ago were in active strategies. In comparison, the active management’s market share has diminished to 72% as of the end of last month as investors pulled $287 billion out of active funds since 2003 and funneled $1 trillion into passive investments. [ETF Managed Portfolios: Disruptive Innovation and Mutual Funds]
As investors jumped onto the current stock rally, passive funds attracted $65 billion over the first two months of the year, compared to the $40 billion in new inflows for active funds.
“Indexing has proven to be a very compelling investment strategy, especially for investors with an extended investment horizon,” McIsaac added.
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Max Chen contributed to this article.