Eclipse of reluctance intensifies in US fund market as assets expand to $13.3 trillion

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For the first time, passively managed and exchange-traded funds in the U.S. have amassed more money than actively managed mutual funds, thanks in large part to years of strong inflows into the increasingly popular ETF wrapper.

According to data released by Morningstar, as of the end of December, assets in passive mutual funds and ETFs in the United States were about $13.3 trillion, compared to $13.2 trillion in assets in active ETFs and mutual funds. It was strong against the dollar. Active funds lost about $450 billion in net money last year. About $529 billion flowed into passive funds.

The rise of passive strategies took years to develop, starting with Vanguard’s launch of the world’s first index mutual fund in 1976, based on the premise that stock pickers could not beat the market over the long term.

A decade ago, passive funds accounted for about a quarter of the U.S. mutual fund and ETF market, according to financial research firm Cerulli Associates. Despite occasional periods of outperformance, active managers have significantly underperformed passive managers in recent years.

Matt Apkarian, Cerulli’s associate director of product development, said active assets still make up about 70% of the market, considering alternative investments such as private equity and private credit.

“It’s not necessarily individual investors. . . . “Active sucks, I’m going passive,” Ms. Apkarian said. “Asset managers and advisors are changing the way they work and becoming more passive.”

The steady growth of passive management in the U.S. funds industry is due to the enduring appeal of ETFs, which hold securities such as mutual funds but trade on exchanges like stocks. This latest milestone follows passive funds overtaking active funds in holdings of the U.S. stock market in 2022.

Investors poured a net $2.5 trillion into passive ETFs from 2019 to 2023, about $600 billion of which in 2023, far more than the roughly $400 billion absorbed by passive mutual funds.

Changes at the top of the asset leaderboard are driven by actively managed ETFs attracting new investment. Although they represent less than 10% of the U.S. ETF industry’s assets, active ETFs will receive approximately $126 billion in inflows in 2023, according to Morningstar, representing more than 20% of all U.S. ETF net inflows last year. .

“Many people are learning that given the challenge of outperforming a benchmark, it’s better to reproduce the benchmark,” said Todd Rosenbluth, director of research at consultancy VettaFi. I am. “Although there has been a recent interest in actively managed ETFs, index-based funds remain the core of most portfolios.”

“What we’re seeing is a rise in high prices in favor of cheap betas and carefully defined, reasonably priced active mutual funds,” said Dave Nadig, financial futurist at VettaFi. We hope that active mutual funds continue to be flushed,” he added.