Passive investors still prefer low-cost vehicles to pricier strategic-beta funds, while active investors are considering relative performance and risk level as well as cost.
Tim Strauts: In today's chart, we are going to look at where assets are invested at different expense ratios for active and passive funds.
When looking at the chart, expense ratios are listed on the X-axis with zero on the left, going all the way up to 1.5% on the right. The blue line indicates passive funds, and the red line indicates active funds. At any point on the line is the percentage of assets invested at that expense ratio or lower.
For example, when you look at the passive fund line, 65% of assets are invested at a 0.1% or lower expense ratio. And for active funds, 65% of assets are invested at a 0.9% expense ratio or lower.
There are many passive funds at higher expense ratios of 0.4%, 0.6%, all the way up to 1%. These funds tend to follow unique benchmarking strategies, potentially using strategic-beta or non-market-cap-weighted benchmarking. But it looks like most investors are really choosing the traditional market-cap-weighted benchmark funds.
For active funds, you can see that assets are much more evenly distributed across different expense ratios. The sweet spot for active management seems to start around 0.6% and go all the way up to around 1%.
When making portfolio decisions, passive investors are using the expense ratio as the primary factor for choosing funds. For active investors, while expenses are important, they are using other factors like relative performance versus the benchmark and the risk level of the portfolio when making decisions.
