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Passive Funds Continue to Take Market Share

ETFs have driven the popularity of passive funds during the last decade.

Sonya Morris, 03/10/2010

The active/passive debate rages on in the investor community. If investors are voting with their dollars, active funds have a strong lead based on total net assets. At year-end 2009, active strategies held more than $6 trillion in assets, while passive assets totaled almost $1.7 trillion. (These figures include both the open-end and the exchange-traded fund markets.)

However, passive strategies have become increasingly popular in recent years, and their advance has been hastened by the growth of the ETF market. During the last decade, passive strategies have taken noteworthy market share from active funds. Active funds began the decade with an 89% share of the market, but that had shrunk to 78% by the end of 2009.

In recent years, it seems as if open-end funds have ceded the sector-fund territory to ETFs. Passive sector funds began the decade with just $2.6 billion in assets out of a total of $173 billion for a slim market share of 1.5%. But as the menu of sector ETFs expanded, investors turned to them in increasing numbers. By the end of 2009, assets in passive sector funds totaled almost $92 billion, representing a market share of 35%.

Fidelity is the biggest player when it comes to active sector funds, but sector funds have continued to lose ground to sector ETFs. The firm's share of sector-fund assets has declined from around 20% in 2000 to 11% in 2009.

  Source: Morningstar Direct Fund Flows

  Source: Morningstar Direct Fund Flows

  Source: Morningstar Direct Fund Flows

Sonya Morris is an associate director of fund analysis with Morningstar.

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