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October 29, 2019 at 09:00 AM
U.S. equity index fund assets have surpassed the assets of their actively managed counterparts for the first time, according to Morningstar’s 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.
Over the 10 years ended June 29, less than one-quarter of actively managed U.S. equity funds outperformed their passive counterparts and just under half outperformed over the previous year, according to Morningstar’s most recent active/passive barometer.
Also contributing to the growth of passive equity funds is the increasing number of compelling quant-based smart beta and thematic passive funds that have replaced individual stock selection.
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.
Danger of Passive Shift Fed
The shift from active to passive investing is not without risk for financial markets and investors.
A recently updated report from the Federal Reserve Bank of Boston and the Federal Reserve Board acknowledges benefits from the shift: It may increase liquidity and reduce redemption risks in financial markets while cutting costs and improving performance for individual investors, since most active funds don’t outperform over the long haul. But the researchers warn that growth of passive investing also poses potential hazards.
