Investors are slowly giving up on actively managed fund strategies in favor of low-cost, passive index-based exchange traded funds.
Pension funds, endowments, retirement plans and retail investors have increasingly turned to passive investment funds that track an underlying benchmark index, funneling almost $1.3 trillion to passive mutual funds and ETFs over the past three years ended August 31 while pulling over a quarter trillion from active funds, the Wall Street Journal reports.
The percentage of overall actively managed invested assets have dramatically declined over the past decade. About 66% of mutual fund and ETF assets are actively managed, compared to 84% 10 years ago, according to Morningstar data.
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Market observers argued that the shift in investment habits is not too surprising as passive funds have long been cited for their superior performance over time, lower fees and simplicity.
In developed markets, “the pressure has gotten so great that passive has become the default,” Philip Bullen, a former chief investment officer at active-management powerhouse Fidelity Investments, told the WSJ.
Among the biggest losers in the ongoing shift toward passive strategies, hedge-fund managers are suffering from huge withdrawals as they struggle to justify exorbitant fees and extended underperformance – hedge funds haven’t outperformed the U.S. stock market as a group since 2008.
The active fund industry has not fared any better, with between 71% and 93% of active U.S. stock funds, depending on the type, either underperforming their benchmarks or closing altogether over the decade ended June 30.
Meanwhile, ETF providers like BlackRock and Vanguard Group have gained a big following for their low-cost, passive strategies. Vanguard Group also recently became the second largest ETF provider as investors sought out the money manger’s cheap index-based options.
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Looking ahead, the Department of Labor’s new so-called fiduciary rule is scheduled to go into effect in April. Financial advisors of retirement accounts will have to demonstrate that their decisions are in the best interest of clients, a change that observers expect will lead to more fee-based accounts instead of the current commission-based models. Consequently, more advisors may turn to cheap index funds to keep overall costs down.
“The case for passive is being made so well and so clearly,” Bullen added, “it has become common wisdom.”
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