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.
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
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
DANGER OF PASSIVE SHIFT FED
funds has benefited those fund com-
panies 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.
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
The shift to passive magnifies indus-
try concentration among asset manag-
ers, which can increase risks when one
or more large firms have operational
problems. It may also increase the cor-
relation of returns and liquidity among
stocks included in the same index and,
in the case of leveraged funds, increase
the volatility of financial markets.
It “is affecting the composition of
financial stability risks … mitigating
some risks and increasing others,” the
report authors write.
Those effects could become more
pronounced if the growing popularity
of passive funds continues, and there is
little evidence that it won’t.
From 1995 to 2018, cumulative net
flows to passive mutual funds and ETFs
totaled $4.7 trillion, compared with $2.0
trillion for active funds, according to
the authors’ calculations based on data
“This milestone has been a long time
coming,” according to Morningstar.
“Over the past 10 years, active U.S.
equity funds have had $1.3 trillion in
outflows and their passive counterparts
nearly $1.4 trillion in inflows.”
That’s not the case for U.S. bond funds.
Active bond funds still have far more
assets than passive funds — $2.66 trillion
vs. $1.45 trillion — although flows into
passive bond funds over the 12 months
ended Aug. 31 were almost 50% larger:
$160.8 billion vs. $109.3 billion for active
funds, according to Morningstar.
The Fed report, which essentially
reviews research about the active-to-passive shift in fund assets, concludes
with a call for more research on the
impact on bonds when added to passive
fixed income indexes, and differences
in liquidity risk management practices
between active and passive funds.
ThinkAdvisor.com Senior Writer Bernice
Napach can be reached at firstname.lastname@example.org.
By Bernice Napach
Changing Tide: U.S. Passive Fund Assets
Now Top Their Active Counterparts
The switch is significant for the industry; the Federal Reserve, though, isn’t
so sure this is a good thing.