ETFs, Passive Strategies Continue to Thump Active

In a volatile 2015, investors lost confidence in active fund managers, shifting into cheaper index-based investments and exchange traded funds that promise to reflect market moves.

According to Morningstar data, investors pulled $207.3 billion from actively managed mutual funds and moved $413.8 billion into passively managed funds, reports Sarah Krouse for the Wall Street Journal.

The shift reflects the broad ongoing change in the fund industry as investors grow weary of active manager’s underperformance and high fees, instead opting for cheap investment products that can passively track major benchmarks.

While active funds outperformed passive rivals in international stock selection and hedge fund strategies, active managers underperformed broad stock and bond markets. The average actively managed stock fund was down 2.9% in 2015, compared to the S&P 500’s 0.7% dip. Meanwhile, the average actively managed taxable bond fund dropped 1.8% while the Barclays U.S. Aggregate Bond Index gained 0.55%.

Additionally, some investors may have balked at the higher fees on top of the underperformance in active funds. According to the Investment Company Institute, active equity funds had an average 0.70% expense ratio in 2014 and active bond funds came with an average 0.57% expense ratio. In contrast, U.S.-listed equity ETFs have an average 0.58% expense ratio and U.S.-listed fixed-income ETFs show an average 0.40% expense ratio, according to XTF data.