Passive Funds in U.S. Stock Market Have Nearly Equaled Active Funds

Passive Funds in U.S. Stock Market Have Nearly Equaled Active Funds

What kind of an investor are you: passive or active? Chances are if you’ve been following the recent trend you find yourself on the passive side. But what does that mean exactly? It’s not so much the way in which you invest, but more about what kinds of stocks you invest in.

Passive vs. Active

So what is passive investing, and for that matter active investing? Passive investing is a strategy that tracks market-weighted portfolios or indexes. The most common type of passive investing is to buy an index fund. Typically these funds offer low turnover, good variety, and minimal management fees. That means higher returns compared to a similar investment with higher costs and fees.

On the other hand, those who use a more active approach use brokers or fund managers to buy and sell stocks in an effort to outperform a specific indexlike the S&P 500 Index, for example. A team of people usually manages these funds carefully, and thus management fees are higher for active funds.

Passive Funds Are Making Their Move

For years, active funds have outpaced passive funds in the U.S. Stock Market. However, that trend has been going the other way since the mid-2000s. And the latest numbers show that the balance of power, so to speak, is now almost equal. According to recent data from Morningstar, passive funds have almost matched active funds.

As of the end of April of this year, investors had put $4.305 trillion in passive stock funds. That’s only $6 billion less than inactive funds, which came in at $4.311 trillion. It’s quite possible that when the numbers come out at the end of May, passive funds will have surpassed active ones. This change in the marketplace has been going on every year since 2006.

Why the Switch to Passive Funds?

One of the biggest reasons for the shift is the fees we mentioned earlier. Investors are realizing that the money managers they’re paying so much to help them manage their funds, really can’t beat broad benchmarks of stock market performance. In other words, there is not much reason to pay a fund manager all that money because they offer little or no advantage.

Are Investors Becoming Too Passive?

So the numbers continue to shift to passive funds. In fact, just last month, investors put $39 billion into passive funds, compared to just $22 billion into active funds.
There is some concern the market will take a hit because of too much passive investing. The issue would be that if too much money were put into simply tracking indexes, the rest of the market would suffer. Time will tell if this becomes a problem. But at the moment, it appears that the push by investors into passive funds is not slowing down anytime soon.

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Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

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