The ETF universe has attracted record inflows year after year, and the pace is only expected to quicken in 2018 as the ongoing shift from active to passive investing accelerates.
Goldman Sachs projects asset inflows into ETFs is poised to pick up pace next year and hit a record high, with flows into U.S. stock ETFs expected to surge by a third to $400 billion, reports Adam Samson for the Financial Times.
“The secular shift from active to passive management should persist next year, driving inflows into equity ETFs and outflows from mutual funds,” portfolio strategist Arjun Menon said.
Fueling the increased dissatisfaction for traditional actively managed open-end mutual funds, many active managers have underperformed benchmark indices over the years, and investors are growing fed up with paying high fees for the underperformance.
For example, according to the latest S&P Dow Jones Indices’ SPIVA U.S. scorecard for mid-year 2017, 56.6% of large-cap active managers underperformed the S&P 500 at over the year ended June 2017, while 60.7% of mid-cap managers underperformed the S&P MidCap 400 and 59.6% of small-cap managers underperformed the S&P SmallCap 600.
Related: Charles Schwab Reveals Rising ETF Demand as Bull Market Extends
Looking at the longer five-year period, 82.4% of large-cap managers, 87.2% of mid-cap managers and 93.8% of small-cap managers have underperformed their respective benchmarks. The numbers were even worse over the past 15-year period as 93.2% of large-cap managers, 94.4% of mid-cap managers and 94.4% of small-cap managers failed to outperform on a relative basis.
Meanwhile, demand for passive, index-based ETFs are on the rise, providing investors with a cheap way to capture exposure across a variety of investment themes and market segments.
Furthermore, years of Federal Reserve stimulus and loos monetary policies have impeded stock pickers’ ability to differentiate from specific picks, bolstering the appeal of passive funds that just buy the broad markets at a low cost.
According to Goldman Sachs, ETFs and mutual funds that passively track indices now make up 6% of the total American stock market, compared to 3% in 2009.
For more information on ETFs, visit our ETF Performance reports category.