Underperforming Stock Pickers Explain Passive ETF Growth

Savita Subramanian, BofAML’s equity and quant strategist, argues that fund managers’ “recipe for distress may boil down to a few factors,” including high levels of correlation, which makes it difficult to outperform market benchmarks.

Moreover, momentum stocks took an unusual pommeling over the first quarter, notably biotechnology sector stocks, which dipped into a bear market, along with the general underperformance among common fund manager picks.


Consequently, the ongoing underperformance in active stock funds helps explain the continued investment preference for passive index ETFs that try to reflect the performance of an underlying index but with lower costs than active options. There are currently 751 passively managed stock ETFs that show an average 0.57% expense ratio – the cheapest show a 0.03% expense ratio.

So far this year, investors have yanked $50.2 billion from equity mutual funds and $176 from stock ETFs, according to BofAML and EPFR Global.