New Champs: Index Funds Edge Past Actives in Stock Market Share

Better performance and lower fees lead to switch. Demographics, too.

The trend is inexorable: index funds now command a larger share of the U.S. stock market than actively managed funds do, according to Investment Company Institute data.

Passive funds—both mutual funds and exchange-traded funds—edged past active funds in 2021, 16% to 14%. Back in 2011, index offerings were just 8% of the equity pie, while active funds made up 20%.

Indeed, other types of investors hold the bulk of stocks (70%): hedge funds, pension funds, life insurers and individuals. Over the past decade, ICI figures, more than $2 trillion has shifted from active to passive vehicles, mainly ETFs. U.S.-listed ETFs, the vast majority of them in index funds, have enjoyed a quintupling of their assets since 2012, rising to $7.2 trillion.

The growth of index funds, primarily in ETFs, has a lot to do with the better returns that the passive strategy offers. Last year, just 45% of actively managed funds outperformed passive indexes, often the S&P 500. Ben Johnson, Morningstar’s director of global ETF research, has said that odds of beating a benchmark “are not great.”

Speaking at the research firm’s conference last month, he pointed out how much lower fees were for index funds, compared with their active counterparts. ICI data shows that equity index mutual funds only charge 0.06% of an investment dollar, versus 10 times that for active ones.

The trend favoring index ETFs has demographics working in its favor, which should serve the category well going forward. The average age of a head of household who owns ETFs is 45, six years younger than for mutual funds, according to ICI.

Index funds, whether in mutual funds or ETFs, are concentrated in the hands of giant asset managers such as Vanguard and Fidelity, ICI notes in its latest survey. The top five fund companies account for 54% of the fund industry’s total assets, and the biggest 10 control 87%.

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