It’s official: inexpensive index funds and ETFs have finally eclipsed old-fashioned stock pickers.

Passive investing styles have been gaining ground on actively managed funds for decades. But in August the investment industry reached one of the biggest milestones in its modern history, as assets in U.S. index-based equity mutual funds and ETFs topped those in active stock funds for the first time.

Stock picking isn’t dead. But the development marks the official end of money managers’ position as the guiding force in the American stock market -- and the seemingly inexorable rise of low-cost index-driven investing. If, as expected, the shift keeps gathering momentum, the implications will be enormous for the industry pros, financial markets and ordinary investors everywhere.

Even one-time star managers like Peter Lynch, who in his heyday turned the Fidelity Magellan fund into a giant through his stock-picking prowess, concedes there’s no turning back.

No Second-Guessing

“We have so many funds beat the market 10 years, 20 years, but we’re not going to second-guess the customer,” Lynch, Fidelity’s vice chairman, said in an interview. “We’re not going to say, ‘You fool! You idiot!’ If you want to buy an index fund, here it is.”

And buy they have. August fund flows helped lift assets in index-tracking U.S. equity funds to $4.271 trillion, compared with $4.246 trillion run by stock-pickers, according to estimates from Morningstar Inc. Investors added $88.9 billion to passive U.S. stock funds while pulling $124.1 billion from active this year through August, the firm estimated.

The unraveling for stock pickers accelerated after the financial crisis, when investors burned by the markets flocked to low-cost passive funds.

Passive funds came onto the scene in the 1970s and took hold with the advent of ETFs in the ‘90s. Their popularity soared with the bull market that began in 2009, as cost-conscious investors rode benchmark indexes and most managers lagged.

Driving the migration is cheaper fees. Passive U.S. equity funds cost an average of about 10 cents a year per $100 of assets, compared with 70 cents for active funds.

“That represents investors keeping more of their own money,” said Eric Balchunas, a Bloomberg Intelligence analyst. “If there’s a loser in this, it’s probably the asset-management industry. The rise of passive represents the rise of very low fee products and ultimately that’s going to mean some pain for them.”

Race for Revenue

As fees compress, firms are casting wider nets for revenue. Vanguard Group, the $5.6 trillion giant that started the revolution with its S&P 500 Index mutual fund, is pushing harder into the personal advice business. BlackRock Inc. is looking overseas for growth. Fidelity has turned to securities lending and is trying to build market share by offering zero-fee funds.

Flows at Boston-based Fidelity, which lost its position to Vanguard as the largest U.S. mutual fund manager in 2010, show how strongly tastes have changed.

While many of its biggest active products, such as the $118 billion Contrafund, racked up better returns, customers pulled $20 billion from its traditional equity fund lineup in the first half of 2019 and poured $52 billion into its passive offerings, Morningstar estimates.

“They’re far more tolerant of passive products, partly because of how they’re investing,” Kevin McDevitt, the Morningstar senior analyst who assembles the fund flows report, said in an interview. “It’s kind of a set it and forget it kind of thing.”

Financial advisers are helping to fuel the move. They can build client portfolios from an array of index offerings. That approach caps potential gains, as index funds won’t top any year’s performance charts. It also limits manager risk -- the chance that a star will suddenly stumble.

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