After years of assets moving towards lower-cost investment products, many passively indexed mutual funds and ETFs are poised to overtake their active competitors in terms of assets.
As of the end of April, passive and active U.S. equity fund assets had “essentially reached parity” at $4.3 trillion each, according to Morningstar’s most recent monthly report on asset flows.
At the end of 1998, there were 6.5 times as many assets in actively managed U.S. equity funds as there were in index funds, according to the report. By 2006, the last calendar year in which actively managed U.S. equity funds saw inflows, active funds held 3.7 times as many assets as passive U.S. stock funds.
After the 2008 financial crisis caused major drawdowns in equity funds, investors returned to U.S. equities with a preference for low-cost indexed strategies in lieu of active management.
This move towards passive indexes was accompanied by a shift in asset allocation towards more large-cap blend funds. In 1998, large-cap blend funds accounted for 34 percent of U.S. equity assets, of which 10 percent was passively managed, but at the end of April, 44 percent of U.S. equity assets were in large-cap blend funds, of which 33 percent were passively managed.
The shift came largely at the expense of active large-growth and value funds, which went from accounting for 54 percent of the assets in U.S. equity funds in 1998 to comprising just 21.7 percent of the assets in U.S. equity funds at the end of April.
Yet active management still reigns supreme in other asset classes and categories, like international equities and taxable bond funds, according to Morningstar. For example, in municipal bond funds, 95 percent of investor assets are in active strategies.
The report’s authors asked how long active managers will be able to hold off their passively indexed competition in less efficient asset classes.
“Even if the result isn’t a surprise for U.S. stock funds, the sea change that has taken place in investors’ preference for index funds, and the impact that has had on the asset-management industry, is no less dramatic,” they wrote. “And while index mutual funds date back to Vanguard’s launch of the first S&P 500 fund in 1976, it was really only in the wake of the 2008 financial crisis that investor tastes began to dramatically change.”
ETFs have also played a role in the decline of active management, according to Morningstar, as they added additional competition for incumbent stock fund managers.