US Videos

Pedal to the Metal for Passive Fund Growth

Timothy Strauts

Tim Strauts: In today's chart, we are going to examine fund-flow trends in the U.S. equity space by looking at rolling 12-month flows into active and passive funds. 

In the 1990s, investors consistently put more money into active funds than passive funds. That behavior changed around 2005 as more money started to flow to passive options. This date coincides with the growth of ETFs. Since then, passive flows have accelerated while active flows have tumbled to all-time lows. 

The U.S. equity market is one of the most efficient markets in the world, which makes it difficult for active management to add value after fees. This doesn't mean that active management is dead, but that consolidation is happening in the industry as underperforming active funds lose money to index funds. Active funds have over $3.8 trillion in assets, which is still larger than the $2.5 trillion that passive funds have. 

In the next five years, we'll likely see passive funds continue to grow and eventually reach parity with active funds.