Passive investing hit a major milestone last year as indexed fund assets outweighed active counterparts in the US for the first time by the end of the December quarter.
Morningstar data shows passive funds in the trend-setting US market managed almost US$13.3 trillion as at December 31 last year, compared to more than US$13.2 trillion in active investment vehicles following a cross-asset indexing binge.
“After steadily encroaching on active’s turf for years, passive funds closed 2023 with more assets,” the Morningstar report notes. “While U.S. equity flows have long favored passive products, international-equity and bond-fund flows have followed suit, helping to get passive funds over the hump.”
Index investing took off spectacularly in the wake of the 2008 global financial crisis nadir, led first by share funds with fixed income – considered a stronghold of active styles – succumbing five years later.
“Active bond funds pulled in more dollars on a net basis than passive counterparts for years until 2013,” the research house says. “They haven’t achieved that feat in a calendar year since. International-equity fund flows began favoring passives in 2008, and U.S. equity fund flows first turned that way in 2005. It’s been one-way traffic over the past decade.”
The US indexing revolution has also anointed a new product hero with the inexorable rise of the exchange-traded fund (ETF) swamping the traditional unlisted variants.
“Passive ETFs took in $2.5 trillion over the past five calendar years, while passive open-end funds collected just $386 billion,” Morningstar says. “In fact, the top three ETF flow leaders over that stretch outdid open-end funds all by themselves: Vanguard 500 Index Fund, Vanguard Total Stock Market Index, and iShares Core S&P 500 ETF collectively gathered more than $400 billion.”
The BlackRock iShares ETF range topped the US annual net flow statistics after banking more than US$107 billion followed by State Street (almost US$80 billion) and Vanguard (close to US$77 billion).
But while indexers in the US reached a long-anticipated majority in 2023, the winning moment came amid a damp squib year for the overall fund sector with net flows of just US$79 billion.
The 2023 US fund flow figure “represented the second-lowest positive organic growth rate in Morningstar’s data beginning in 1993”, the report says.
Furthermore, the 12-month period also cemented another bleak year for sustainable strategies after a negative-flow result in 2022.
“Sustainable funds experienced outflows of more than $13 billion in 2023, equivalent to a negative 4.6% organic growth rate—significantly worse than the broader U.S. fund universe’s 0.35%,” the report says. “Sustainable U.S. equity funds were responsible for the brunt of the outflows, as they shed over $12 billion. Sustainable taxable-bond and international-equity funds each collected around $1 billion.”
While indexing now controls more than half of US fund assets, active managers still dominate in UK and Europe – albeit as flow trends continue to favour passive options in most jurisdictions.
As at the end of last year, Morningstar reported total UK active fund assets at £870 billion compared to £369 billion in passive vehicles with respective 12-month net flow figures of -£28.3 billion and £13.3 billion.
Similarly, index funds represent just 27 per cent of the total European ‘long-term’ funds in the Morningstar universe but booked net annual flows for the 11 months to the end of November 2023 of €191 billion: by contrast, active funds in the Europe recorded net outflows of over €130 during the same period.
Year-on-year, the passive fund market share increased in both the UK and Europe, according to Morningstar.