Passive eclipses active in US fund market as assets swell to $13.3tn

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Passively managed US mutual funds and exchange traded funds have for the first time amassed more money than their actively managed counterparts, thanks in large part to years of strong inflows into the increasingly popular ETF wrapper.

At the end of December, passive US mutual funds and ETFs held about $13.3tn in assets while active ETFs and mutual funds had just over $13.2tn, according to data released by Morningstar. On net, active funds shed about $450bn last year. Passive funds took in about $529bn.

The ascent of passive strategies has been years in the making, beginning with Vanguard’s launch of the world’s first index mutual fund in 1976 on the premise that stock pickers do not beat the market over the long term.

A decade ago passive funds held about a quarter of the US mutual fund and ETF market, according to Cerulli Associates, a financial research firm. Despite occasional periods of outperformance, active managers have largely fallen short of passive counterparts in recent years.

Active assets remain about 70 per cent of the market when alternative investments such as private equity and private credit are taken into account, said Matt Apkarian, associate director of product development at Cerulli.

“It’s not necessarily retail investors . . . saying ‘Active is terrible and I’m just going to go passive’,” Apkarian said. “It’s asset managers and advisers changing how they’re doing their job and being more willing to use passive.”

The steady growth of passive management in the US funds industry owes a debt to the durable appeal of ETFs, which hold securities like mutual funds but trade on exchanges like stocks. This latest milestone follows passive funds’ overtaking active funds in their share of US stock market ownership in 2022.

Investors poured a net $2.5tn into passive ETFs from 2019 to 2023, including about $600bn in 2023, far more than the nearly $400bn absorbed by passive mutual funds.

The change atop the asset leader board also comes as actively managed ETFs attract new investments. Though they amount to less than 10 per cent of the assets in the US ETF industry, active ETFs pulled in about $126bn in 2023 — more than 20 per cent of all US ETF net inflows last year, according to Morningstar.

“Many people have learned that given the challenges of outperforming a benchmark it is better to replicate it,” said Todd Rosenbluth, head of research with VettaFi, a consultancy. “Even with recent interest in actively managed ETFs, index-based funds remain the core of most portfolios.”

Dave Nadig, VettaFi’s financial futurist, added: “Hopefully what we’re seeing is the continued flushing of overpriced active mutual funds in favour of cheap beta or reasonably priced, carefully defined active.”