Adoption of passive investment products in the U.S. is continuing unabated, and those products’ share of assets under management is on track to overtake the share of assets in active investments in two years, according to Moody’s latest research report.
Moody’s interprets the consumer trend toward passive investment products as akin to the adoption of an improved technology.
“Lower-cost passive investment products more efficiently channel the earnings of corporate America to the end investor than do traditional mutual funds,” the report states.
According to the Moody’s, these products are more efficient because they entail less “leakage in earnings” in the form of management fees to asset managers, commissions and trading costs to brokers, and below-average investment decisions leading to loss of capital from the average active manager to the small group of truly superior active investment managers.
Recent developments have also sped up the road to passive investing’s dominance.
For instance, outflows from active funds have accelerated. In 2018, mutual funds experienced the highest annual recorded outflow in the ICI data set, according to Moody’s.
“Despite market volatility late last year that theoretically should have created more opportunities for active managers to generate trading gains, active funds’ share did not increase and passive flows did not decline,” the report states.
The shift to passive products is also reflected in the increased pace of M&A activity, according to Moody’s. This is even moreso as acquirers seek out passive ETF assets.