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.
Consequently, the changing investment attitudes have been a major boon for passive fund managers like the Vanguard Group, which attracted an industry record inflow of $236 billion last year, along with the upstart ETF industry.
According to ETFGI data, the U.S. ETF industry gathered $239.8 billion in net inflows over 2015, with $38.0 billion in new inflows over December, the largest asset gathering month for the year and 11th consecutive month of positive net gains.
“2015 was a turbulent year for the markets due to uncertainty in China which spilled over into global markets, concerns about the Middle East and a collapse in energy prices,” Deborah Fuhr, Managing Partner of ETFGI, said in a press release. “The robust level of asset gathering in 2015 shows that more investors are using ETFs/ETPs in more ways due to the market turmoil: retail is using more ETFs through Robo-advisors, institutions are using ETFs as alternatives to futures, and financial advisors are using more ETFs especially in multi-asset portfolios.”
Max Chen contributed to this article.