Elon Musk thinks passive investing has “gone too far.” Cathie Wood called it a “massive misallocation of capital.”
The long-running active versus passive debate has become even more heated than usual during the recent stock market turmoil.
It’s a dispute with trillions of dollars at stake. The advent of passive exchange-traded funds provided an easy, cheap way for investors to get exposure to an index like the S&P 500, leading passive to overtake active in the US domestic equity-fund market for the first time in 2018. Today, its share of the $13.8 trillion market is approaching 58%, according to Bloomberg Intelligence.
Index investing tends to outperform actively managed funds over the long-term. However, that can change when stocks are volatile, giving active managers a chance to shine.
“Active managers probably do their best work in times like this of market dislocation and stress,” said Scott Ford, president of affluent wealth management at US Bank.
So, should investors, who’ve long embraced the “set it and forget it” strategy of putting money into index funds, reconsider right now? And what’s the best approach for those with new money to invest? Here’s what experts say:
Argument for Passive
According to the SPIVA scorecard produced by S&P Dow Jones Indices, 83% of actively managed large-cap funds underperformed the S&P 500 Index over the past 10 years and 85% lagged the benchmark in 2021.
“I was an active money manager for 30 years of my career, and now I’m all about how [passive] ETFs can solve all your problems,” said Diane Pearson at Pearson Financial Planning in Wexford, Pennsylvania.
This was particularly true during the recent bull market, when surging megacap tech stocks like Apple Inc., Microsoft Corp., Amazon.com Inc. and Tesla Inc. played an outsized role in US equity markets, propelling them to record high after record high.
If you bought an ETF tracking the S&P 500 at its low in March 2020, you would have more than doubled your money by the beginning of 2022. That’s a high bar for any active manager to beat, especially since they tend to charge higher fees than low-cost ETFs.