Indexing Fever Spreads

Tim Strauts: Morningstar has an extensive mutual fund and ETF database that covers every major market globally. In today's chart, we are going to look at 2014 active and passive fund flows of four major regions--the U.S., cross-border, Europe, and Asia. The cross-border region is the second largest and includes funds domiciled in tax havens such as Luxembourg and Ireland. Investors in Europe and Asia can invest in these cross-border funds.

In the U.S., passive flows dominated active flows in both the equity and fixed-income spaces. This has been the trend for the last several years, and [there are no signs of this] stopping anytime soon. In the U.S., index investing started in equities first and then moved to fixed income years later. Index investing in other global regions is just starting to catch on. We are starting to see this same trend in Europe and Asia, as in both regions index funds received more assets then non-index funds. Fixed income is still dominated by active in these regions, but I would expect that to change in the next five years.

In Europe, most investors have their assets held with one of the large banks, and there isn't a strong do-it-yourself investing culture. When investors invest for themselves, they tend to choose funds with lower fees. Also, fee-based advisory accounts have only recently started to gain traction with financial advisors. In the United States, the shift to indexing coincided with the growth of advisory accounts. In the years ahead, I would expect indexing to continue to grow in the international regions.