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Portfolio > Mutual Funds > Equity Funds

Passive Overtakes Active in US Stock-Fund Assets: Morningstar

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U.S. equity index fund assets have surpassed the assets of their actively managed counterparts for the first time, according to Morningstar’s latest fund flows report.

As of Aug. 31, the assets of mutual funds and ETFs invested in U.S. equity index funds totaled $4.27 trillion, more than the $4.25 trillion invested in actively managed U.S. equity funds.

Both categories saw outflows in August, but the outflows in actively managed U.S. equity funds, at $18.94 billion, dwarfed the outflows from U.S. equity index funds, which were less than a billion. For the year ended Aug. 31, the outflows from passive U.S. equity funds actually exceeded those from actively managed funds: $231 billion vs. $201.7 billion.

“It is a great milestone that there’s more money in passive equity funds than active equity ones,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA. He attributes the growing popularity of passive equity funds to lower costs, leading to adoption by investors and advisors, and often stronger performance relative to actively managed funds.

Indeed, over the 10 years ended June 29, less than one-quarter of actively managed U.S. equity funds outperformed their passive counterparts over the 10 years ended June 29 and just under half outperformed over the previous year, according to Morningstar’s most recent active/passive barometer.

(Related: Active Equity Funds Rebound, but Will Performance Last?)

Also contributing to the growing popularity of passive equity funds is the growing number of compelling quant-based smart beta and thematic passive funds that have replaced individual stock selection, says Rosenbluth.

He expects the trend toward passive and away from active equity funds will persist because younger investors and advisors are becoming more comfortable paying less and tracking well-known indexes rather than seeking actively managed funds that often fail to outperform. “While there are some consistently strong performing, lower cost active equity funds, they are harder to find without digging,” adds Rosenbluth.  

The growing popularity of passive funds has benefited those fund companies that focus on index funds, such as Vanguard and BlackRock, and hurt those companies that continue to stress active management, such as Franklin Templeton and Invesco. The latter two saw net outflows of $25.6 billion and $35.3 billion, respectively, for the year ended Aug. 31, while the former saw inflows of $170 billion and $121 billion during the same period.

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