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Study: Passive Investments Set to Surpass Active by 2024

A new report from Moody’s predicts that ETFs and index funds will grow to over half the global financial market by as early as 2021.

  • Frances Denmark

Investments in passive vehicles like index funds and ETFs – now at $6 trillion – are on track to surpass those in actively managed funds by 2024 at the latest, according to a report released by Moody’s Investors Service.

This historic inflection point in global assets could be reached as soon as 2021, the credit ratings agency says.

A confluence of events have conspired to tip allocations away from asset managers who are highly paid for their stock selection, and towards those who receive modest sums for assembling portfolios of all companies in a given benchmark, such as the S&P 500 or Russell 3000.

The most influential factors in this shift include the poor performance of the majority of active managers – an underperformance estimated at about 200 basis points a year, or 2 percent – and the lower cost associated with passive investing: 11 basis points versus an average of 84 basis points for active management.

The growth of the ETF market and robo-advisors – programs that automatically assemble simple, low-cost investment portfolios for retail investors, often using ETFs – have also contributed to passive’s current 28.5 percent share of the U.S. financial markets. Outside the U.S., where passive assets are only between 5 percent and 15 percent of the total, these investments are also anticipated to grow.

Regulation such as the U.S. Department of Labor’s new fiduciary rule, set for enactment in April, is believed to be another accelerator of passive investing as advisors limit their recommendations of expensive funds for client portfolios.

Asset managers that have a proven track record with ETFs and other passive strategies – such as smart beta or traditional index funds – stand to profit from this trend. Among the firms poised to reap the benefits are the Vanguard Group, a long time proponent of indexing thanks to founder Jack Bogle; BlackRock, which, with its 2009 purchase of Barclay’s Global Investors and its iShares, acquired an early entrant in the ETF market; State Street, Dimensional Fund Advisors, and Invesco.

“We view the passive phenomenon as comparable to the adoption of a new technology,” writes Moody’s. “Investor adoption of passive and low-cost products will continue irrespective of market environments.”