Passive ETFs Are Beginning to Overshadow Traditional Index Trackers

Exchange traded fund assets under management could finally take over index-based mutual funds for the first time after the global passive investment category crossed $15 trillion in assets last year.

At of the end of 2020, ETFs held $7.71 trillion, just shy of index mutual funds’ $7.76 trillion, the Financial Times reports.

However, ETFs have enjoyed powerful inflows so far this year. While comprehensive global data comes with a lag, consultancy ETFGI calculated that assets under management in ETFs was at $8.33 trillion as of the the end of March.

“People are increasingly building entire investment strategies using only ETFs. The choices you have vastly outstrip what you have in traditional index funds,” Todd Rosenbluth, head of ETF and mutual fund research at CFRA, told the Financial Times.

Rosenbluth pointed out that over $350 billion of money has flowed into ETFs for the year so far ended May 12, Investor’s Business Daily reports. The pace of inflows could accelerate and double the $503 billion in net inflows to ETFs in all of 2020.

“Even we are surprised by how strong the net flows have been in this short period,” Rosenbluth told IBD.

ETFs have enjoyed steady inflows over the past decade as more investors shift away from expensive and often underperforming actively managed mutual funds and into cheap, index-based ETFs.

“We’ve seen record inflows over the past quarter, and largely into ETFs,” Inigo Fraser-Jenkins, a strategist at Bernstein, told FT. “There’s an ongoing desire to reduce fees — and that favors the shift from active to passive funds.”

The growing popularity of ETFs as an investment vehicle has also driven the explosion in fund products that help investors grasp various market segments. According to ICI data, at the end of last year, there were 6,725 ETFs globally, compared to just 3,196 traditional index funds.

“The shift from active to passive investment strategies has profoundly affected the asset management industry in the past couple of decades, and the ongoing nature of the shift suggests that its effects will continue to ripple through the financial system for years to come,” the Federal Reserve noted in a 2019 paper.

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