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By Jason Stipp and Christine Benz | 01-08-2015 04:00 PM

Moving to Index Funds? Bring This Roadmap Along

Before going passive, investors need to check under the hood and examine expenses, says Morningstar's Christine Benz.

Jason Stipp: I'm Jason Stipp for Morningstar. Several indicators are showing increasing numbers of investors moving into index funds. So, what should you keep in mind if you're one of them? Morningstar's Christine Benz, our director of personal finance, is here with some tips.

Christine, thanks for joining me.

Christine Benz: Jason, great to be here.

Stipp: So, how big is this trend? What are some of the indicators of the money that's flowing from active into passive investments?

Benz: It's a huge trend. Our research analysts have been monitoring this really closely. When we look at the outflows from actively managed U.S. equity funds over the one-year period through early December, roughly $92 billion in assets left actively managed U.S equity funds, and then about $160 billion in new flows went into passively managed U.S. equity products--both traditional index funds and exchange-traded funds. So, this trend appears to be here to stay because we've seen it unfolding over a period of several years, but it's even picking up in pace over the past year.

Stipp: In general, I think we would say that this is probably a good thing for investors as a lot of these index funds are low cost and broadly diversified.

Benz: Absolutely. When you look at the data on active management, what you see is that historically the typical active manager has not been able to beat his or her benchmark. So, I think, in a lot of ways, individual investors and financial advisors and institutions are making a really rational choice here. They're saying if we can't beat the market, perhaps we can just join it, earn our fair share, and try to keep our costs down as much as we possibly can.

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