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By Timothy Strauts | 03-18-2014 10:00 AM

Morningstar Minute: Will Index Investing Be the Norm?

Passively managed funds have surged in popularity during the last decade and could soon overtake active management as the dominant portfolio strategy.

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.

Tim Strauts: Over the last 20 years, we have seen a strong shift toward index investing. In 1994, over 94% of U.S.-equity mutual funds and ETFs were invested in active managers, and only 6% in passive strategies.

Now in the period of the 1990s to early 2000s, we saw active managers taking in more assets than passive managers. But that trend changed in 2006, as passive managers continued to see strong inflows, but active managers saw strong outflows, a clear case of investors selling their active strategies and buying passive strategies. It's clear that the average investor does not feel that active managers are justifying their fees and expenses through outperformance.

Today the current makeup of the market is 64% active and 36% passive; that's a big increase from the 6% 20 years ago. In the next five years, passive strategies could overtake active and cross over the 50% threshold.

What this means for the market is uncertain, but it's something investors should keep an eye on.

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