Passive Investing Rises Still Higher, Morningstar Says

Assets in passive equity strategies grew to nearly 45 percent of all stock market investments in the U.S. last year.

Andreas Arnold/Bloomberg

Andreas Arnold/Bloomberg

Active equity managers continued to lose ground to index funds last year, as U.S. investors poured $470 billion into passive equity strategies, according to Morningstar.

At the same time, the country’s active managers suffered a net $175 billion of outflows, the investment research firm said in a report Monday. By the end of 2017, passive investments accounted for almost 45 percent of all equity assets in U.S. mutual funds and exchange-traded products.

Passive investing has climbed steadily over the last decade. At the start of 2007, passive funds made up just 20 percent of U.S. equity assets under management – a market share that has since more than doubled, Morningstar data show.

The rise of passive has not been limited to the U.S. In Asia, the percentage of assets in passive equity funds has risen to 47.6 percent, up from as low as 15.8 percent in 2007. Meanwhile, European adoption of stock-index funds now accounts for a third of equity assets under management, up from 13.2 percent at the start of 2007.

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Although most of the passive flows have been concentrated in equities, fixed-income managers have not been immune to the shift. Passive bond funds made up 30 percent of fixed-income assets in the U.S. at the end of 2017, up from 10.9 percent a decade before.

Elsewhere, assets have been flowing out of passive fixed-income strategies. In European fixed income, passive’s market share dipped to 18.3 percent at the end of last year, while passive assets in the Asian bond market fell to 9.5 percent of assets under management.

Still, investing in passive fixed income remains higher in both continents than it was at the start of 2007, when bond indexes captured 4.5 percent of the European market and 7 percent of the Asian market.

Globally, Morningstar reported a total of nearly $2 trillion in flows to mutual funds and exchange-traded funds over the course of 2017, led by $800 million in the U.S. BlackRock attracted the most capital, with about $400 billion of inflows, including $240 billion added to the firm’s iShares ETFs.