The passive index-based ETF industry has enjoyed phenomenal success, attracting trillions of dollars in assets under management. While there are some concerned of the rising risk due to the increased attention, ETFs are expected to continue on its breakneck growth speeds.
John “Mac” McQuown, co-founder of Dimensional Fund Advisors, argued that there no end to the flood of money going into passive investment vehicles, the Financial Times reports.
“I don’t see why it won’t [continue],” McQuown, the inventor of one of the first index funds, told Financial Times. “First of all it just has better results. And it has better satisfaction exhibited by investors.”
Attracted by the low investment costs and disappointed by the underperformance of costly active strategies, many investors and financial advisors have funneled billions into passive vehicles, namely index-based ETFs, in recent years. Despite a greater number of active funds beginning to outperform this year as stock picking grows more prominent, money continues to bleed out of traditional active mutual funds and flow into passive ETFs.
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Among the most attractive traits found in ETFs, a low expense ratio has been a major selling point as passive ETFs charge a fraction of the fees found in their active counterparts. High fees have also contributed to the long underperformance of many active managers seeking to outperform a major benchmark.
McQuown also pointed to the growth of alternative index-based strategies or smart beta ETFs that combine both active and passive qualities. The smart beta funds actively trade based on the quantitative strategies research developed through a passive index-based wrapper.
“Where passive ends and active begins or vice versa is not that easy to determine. At Dimensional we stay away from talking about it too much but we certainly are passive,” McQuown said. “Smart beta is like hedge funds. Another cliché. Both are excuses for raising fees.”
For more information on passive ETFs, visit our indexing category.