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Passive U.S. Equity Funds Catch Active U.S. Equity Funds

Despite the shift, it hasn’t been a great decade for U.S. equity funds in terms of overall flows.

Note: This is an excerpt from the Morningstar Direct U.S. Fund Flows Commentary for April 2019. The full report can be downloaded here.

It wasn't quite official as of April 30, 2019, but it was darn close. Passive U.S. equity funds had assets of $4.305 trillion by month-end, just $6 billion shy of active U.S. equity funds' $4.311 trillion. Passive U.S. equity funds closed the gap with more than $39 billion in April inflows, versus more than $22 billion in outflows for their active counterparts. In market share terms (for open-end and exchange-traded funds combined), active U.S. equity funds had 50.04% market share versus passive U.S. equity funds' 49.96%.

The May numbers will almost certainly show passive U.S. equity funds' total assets eclipsing active funds. This isn't a surprise given the overwhelming outflows from active U.S. equity funds to passive options over the past 10 years. Still, 10 years ago, active U.S. equity funds had about 75% market share. And at that point we were just entering one of the longest bull markets in U.S. history. If you had known this, would you have guessed that active U.S. equity funds were on track to lose $1.26 trillion in outflows?

Note that the shift to passive U.S. equity funds hasn't come with much growth for the group overall. Passive U.S. equity inflows largely matched active outflows over the past 10 years, taking in about $1.35 trillion. Thus, U.S. equity funds--active and passive--collected just $86 billion in net new money during a 10-year bull market. If that still sounds like a lot of money, that's organic growth of just 3.3% (unannualized) over a decade.

It looks downright paltry compared with the past 10 years for taxable-bond funds, which collected nearly $2 trillion overall. Many attribute these flow trends to demographics as aging baby boomers cut their equity holdings in favor of more-conservative bond funds. In April, taxable-bond funds collected $42.5 billion, the group's second-best month over the past three years and the best since January 2018.

While nowhere near as dominant as their U.S. equity cousins, passive taxable-bond funds are also growing their share. They collected about $25.5 billion in April versus $17.0 for active taxable-bond funds. Over the past 12 months, passive taxable-bond market share has grown to 32.7% from 29.9%.

Other trends for the month of April include:

  • The only other category with inflows was municipal bond, with $7.1 billion. All other categories had outflows, including international equity, which saw about $8.8 billion in outflows. After strong demand in recent years, international-equity funds have taken in just $4.3 billion over the past 12 months.

  • Fidelity appeared to dominate inflows with about $28 billion, but much of this owed to share-class swaps by its Freedom target-date funds. Vanguard trailed both iShares and SPDR State Street with $5.5 billion in inflows, its weakest showing since 2013.