Financial advisors are leading the passive investment charge away from actively managed mutual funds and ETFs.
“Independent advisors believe less in the value of active strategies, compared to wirehouse reps, and as we continue to see advisors shift from large broker-dealers to the independent channel, we expect increased use of ETFs and increased use of passive strategies,” said Matt Apkarian, associate director of product development research at Cerulli Associates in Boston.
Citing Cerulli research showing passively managed mutual funds and ETFs wrapping up the year with $13.25 trillion for an $8 billion lead over actively managed funds, Apkarian said passive strategies will continue to pull away from here.
“We’re seeing continued outflows from active mutual funds and minor inflows into passive mutual funds,” Apkarian said.
Meanwhile, he said active ETF strategies are seeing upwards of $10 billion worth of monthly inflows and passive ETFs are seeing monthly inflows in the $100 billion range.
Advisors Actively Going Passive
For December, Cerulli’s research shows more than $118 billion worth of inflows into passive mutual funds and ETFs, compared to more than $69 billion worth of outflows from active mutual funds and ETFs.
December was the most extreme example of the year, but November flows moved the same way with more than $86 billion shifting into passive and more than $52 billion exiting active. Advisors know better than anyone that passive strategies tend to outperform active strategies in most asset classes,” said etf.com senior ETF analyst Sumit Roy.
“It’s hard to justify paying higher fees to active managers when you can get a better-performing strategy for much less,” he added.
According to the report, mutual funds overall experienced $70.6 billion worth of outflows in December, but still grew by $670 billion during the month due to market performance.
Passively managed mutual funds had $4.1 billion worth of inflows in December to partially offset the overall outflows.
“ETFs, and specifically index ETFs, are a critical investment tool as advisors are using such vehicles to not only implement strategic allocations, but also to actively express their views,” said Brendan McCarthy, head of ETF Capital Markets at Goldman Sachs Asset Management.
“As ETF adoption has grown, investors have become more familiar with the benefits of the wrapper, namely the lower cost, tax efficiency and tradability, and investors now expect to receive those same benefits from the actively managed products they use, thus the increased number of active ETFs being launched,” he added. “Performance will always drive advisors’ decisions to use an actively managed product, however the forward expectation is that active products also leverage the efficiencies of the ETF wrapper.”
While active and passive strategy assets are neck and neck across mutual funds and ETFs, Apkarian said the assets swing well in favor of active once you factor in the broader universe of separately managed accounts, money market funds, and various alternative products like business development corporations and non-traded real estate investment trusts.
“Analyzing the bigger picture beyond just mutual funds and ETFs is more art than science, but I’d say about 70% of that larger universe is still in active products,” he said.
In terms of where the passive-active balance tilts going forward, Apkarian said, “we don’t know where the inflection point will be.”
“Some research shows more money in passive strategies will just make crashes and recoveries happen faster,” he said. “But if there’s too much money in passive, it also becomes easier to actively manage a portfolio. What we do know is that when things get shaky demand for active increases, and when things are going well demand for passive increases.”
Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter
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