Index funds will grab more than half the assets in the investment-management business by 2024 "at the latest," Moody's Investors Service Inc said in a research note on Thursday.
Investors are increasingly buying relatively cheap funds that mimic benchmarks, while shunning active portfolio managers who strive to beat the market and often come up short. Passive funds currently account for 29 percent of the U.S. market, according to Moody's.
"We estimate that passive investments will overtake active market share between 2021 and 2024," the credit rating company said, noting the changes "will continue irrespective of market environments."
"The main driver of flows out of active funds into passive funds has been investors' growing awareness that, by definition, actively managed investments, in aggregate, cannot deliver above average performance, and that investing is therefore a zero-sum game - for every winner, there must be a loser."
In 2016, passive funds in the United States attracted $506 billion, and actively managed funds posted $341 billion in withdrawals, according to Morningstar Inc.
Some index-tracking exchange-traded funds charge as little as $3 annually for every $10,000 they manage, while the average charged by U.S. stock mutual fund managers is $131, according to data for 2015 from the Investment Company Institute trade group.
U.S. regulators have pushed for more fee disclosure and attempted to reduce conflicts of interest among brokers who sell funds. One such measure, the Obama administration's "fiduciary" rule covering retirement accounts, is being fought by the industry in court.
The rise of passive investments has caused indigestion within the asset management industry, squeezing famously lush profit margins and rewarding a small group of companies with large index fund businesses, such as Vanguard Group, BlackRock Inc and State Street Corp.
Some analysts have argued that the loss of investors who study and bet on individual companies is distorting the ability of markets to set the appropriate prices for stocks and bonds. Others have warned that index funds cannot protect investors from otherwise avoidable market selloffs.
A widely discussed report last year by the broker-dealer Sanford C. Bernstein & Co LLC, for instance, described passive investing as promoting a system of capital allocation worse than both capitalism and Marxism.