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Jill Carey Hall, U.S. equity strategist at BofA Global Research, said passive investing is becoming more popular than active investing in the U.S., but that trend could start to change soon.
The amount of assets managed by passive funds has exceeded the amount of assets managed by active funds, according to data from BofA Global Research. Currently, only 47% of U.S. assets under management are overseen by active funds, down from 80% in 2009, the data shows.
BofA Global Research
Active investing means buying and selling stocks and other investments on a regular basis, while passive investing refers to a buy-and-hold strategy that minimizes buying and selling. One of the most common forms of passive investing is index investing. Investors put money into funds that track broad market indexes, such as the S&P 500 SPX..
Also read: David Einhorn says the market is ‘fundamentally broken’ due to passive investing
Carey Hall said in a phone interview that money has been flowing from active funds to passive funds in recent years, due in part to the poor performance of some active funds. Passive funds typically have lower fees than actively managed funds.
But the shift from active to passive funds may now be at a tipping point, said Carey Hall.
BofA data shows that capital outflows from active funds to passive funds have slowed recently.
With the rise of Robinhood, BofA Securities customers also now buy more individual stocks than exchange-traded funds.
The hype surrounding meme stocks over the past few years has ushered in a new generation of stock pickers, according to Carey Hall.
BofA Securities
In the current market environment, while stock valuations are high, the dispersion of major indexes is high and stock prices tend to be difficult to move. “The index includes both undervalued and overvalued stocks, which tends to be a good environment for stock picking,” said Carey Hall.
Meanwhile, Carey Hall expects further market leadership this year. The stock market’s rally since last year has been primarily driven by a small number of mega-cap tech stocks, but with more participation “we have a better chance of picking stocks that will perform better,” he said. Stated.
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Carey Hall also said his team expects volatility to rise this year, which is good for stock picking.
Which stocks to choose
Investors should be wary of the risks of market-cap weighted indexes, according to a recent memo from a group of BofA strategists, including Carey Hall. The paper said that while the S&P 500 is statistically concentrated in expensive mega-cap stocks, the Russell 2000 RUT, a small-cap index, has a record proportion of non-earnings stocks.
Carey Hall said she is encouraging investors to consider stocks that “work like stocks” to help them become more active this year.
“We find that certain sectors behave differently in stock prices. We find that these are less correlated with the spread of performance. At the same time, some other sectors are more macro-driven; Stocks in the sector could all trade in the same direction,” she said.
For example, sectors like health care are less correlated and have more variation among stocks, while energy stocks are more correlated because they are primarily driven by oil prices, Carey Hall said.
Investors should also consider high-dividend stocks, says Carey Hall.
“In an environment where short-term interest rates are at their peak, stocks that offer high dividend yields that exceed cash yields can be an attractive environment,” he said.
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