In A Monumental Shift, Investors Make Index Funds Top Dog

No more are actively managed funds the kings of Wall Street. Index funds usurped actively managed funds for the first time this week, marking a monumental shift in the way people invest.

As of Aug. 31, index funds held $4.27 trillion in assets, compared to $4.25 trillion currently in active funds, Morningstar research found.

Granted, actively managed funds aren’t close behind. The research shows a growing change in investor sentiment toward index funds that has been a long time coming.

Over the last decade, index funds have gained popularity. A large percentage of that happened after the Great Recession, as investors realized that active managers couldn’t shelter them from a crumbling market.

Last year was further proof of that after actively managed funds failed to outperform passive funds in a shaky 4Q. This was despite the notion that actively managed funds thrive in market volatility.

Abby Vick, an independent advisor with Paradigm Money Management, said there are a variety of reasons for this shift to occur.

“Gen X lived through 2008 and are already a distrusting generation. Additionally, millennials are using investing apps and robo-advisors to do their investing because of their small portfolio size and their tendency to trust technology over humans.”

Investors may also love index funds for their cost efficiency.

Created by Vanguard’s John Bogle nearly 50 years ago, index funds tend to be less expensive for investors than actively managed funds. The average expense ratio of passive funds was 0.15% last year compared to 0.67% for active funds, according to Morningstar.

The big three firms seeing boosts from this shift are Vanguard, BlackRock and State Street, claiming nearly 80% of the index fund market.

Another potential reason for this shift is performance. Index funds tend to perform better over time, making them an excellent choice for investors saving for retirement.

While investors gorge on the success of their index funds, the financial services industry is left with many questions:

“Is this the next bubble?” one firm owner asked on LinkedIn. “Does this signal the end of a profession?” another inquired.

Vick asked her LinkedIn followers, “Is this going to change our industry? Inquiring minds want to know.”

AdvisorNews Managing Editor Cassie Miller may be reached at [email protected]. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.