A preference for passive funds over active will approach the tipping point this year.
When it comes to mutual funds and exchange-traded funds that buy US stocks, those that passively track indexes now hold 48 per cent of assets, according to estimates from Morningstar. They will top 50 per cent in 2019 if the current trend holds.
That would mark a tipping point for the investing industry, which for decades built its stature on the prowess of stock-and-bond pickers seeking to beat the markets. In recent years, investors have ditched those active managers in favour of ETFs and other index funds, which typically offer a way to get market exposure at far lower fees. The shift continued this year even as the benchmarks the passive funds follow wobbled and fell.
“I’d expect the trend from active to passive to continue,” says Benjamin Phillips, a consultant with Casey Quirk. “It’s not simply investors grabbing the tail of the bull - it’s a secular shift in how advisers are building portfolios.”
Passively managed US stock funds increased their market share to 48.1 per cent as of November 30 from 45.7 per cent a year earlier, Morningstar data show.
Beyond US equities, the power balance tilted broadly to index funds in 2018. The move was less pronounced in bonds, where money managers have more consistently outperformed their benchmarks. Investors pulled an estimated $150 billion in the first 11 months of the year from actively run funds across asset classes, excluding money markets. In contrast, they added $395bn to passive funds, according to Morningstar.
The divide was especially dramatic in November as market volatility picked up. Active funds lost more than $50bn to redemptions while index funds took in a similar amount.
Mutual fund outflows could accelerate if investors cashing out amid recent volatility choose to use ETFs when they reinvest.
“Active mutual fund investors have a history of panicking when things get tough,” says Eric Balchunas, senior analyst with Bloomberg Intelligence. “You tend to see passive gain market share in difficult environments.”
It isn’t all positive for passive funds in 2018. While they added market share, their flows will fall well short of 2017’s record of almost $700 billion in contributions.
Here’s a look at how the biggest fund companies are faring:
* The company, which started the first index mutual fund for individual investors in 1976, brought in an estimated $168bn through November in passive funds, Morningstar estimates show. That compares with $329bn for all of 2017.
* The Valley Forge, Pennsylvania-based firm is feeling the impact of diminished flows to ETFs, which are on pace to attract just over $300bn industrywide, versus $467bn last year.
* Still, Vanguard is likely to post higher 2018 inflows than any of its rivals.
* The New York-based firm saw passive inflows of $108bn through November, per Morningstar’s estimate. In 2017, they were $213bn. The pace picked up in November when the firm attracted more than $25bn to its US ETFs - a record monthly haul for the company.
* The world’s largest ETF provider has seen the steepest drop in some of its heavily traded funds that are most sensitive to stock movements.
* The firm saw an increase to its passive products in 2018, gathering $64bn through November, as estimated by Morningstar, compared with $52bn for 2017.
* In August, the Boston-based fund giant introduced the industry’s first zero-fee index mutual funds and cut prices across much of its passive lineup. Explaining her firm’s newfound commitment to passive products, chief executive Abigail Johnson said in an October interview, “If we decide to do something I want to be really good at it".
* On the active side, the firm saw $17bn in outflows, Morningstar estimates. Yet that’s good news since altogether Fidelity’s stock and bond pickers could end up with the smallest annual outflow since 2014.
* The Los Angeles company continues to buck the trend by attracting money to its active funds. It added $21.4bn through November, ahead of last year’s total of $16.6bn, according to Morningstar.
* Most of the money has flowed to the company’s target-date retirement funds, which have been gaining market share in recent years.