Passive investing is set to overtake active management in US market share in just four to seven years.
That’s according to Moody’s Investor Services, which said in a report released February 2 that passively managed funds will have more in assets than active funds by 2024 at the latest.
Passive investments, including ETFs and index funds, currently account for $6 trillion of assets globally, and 28.5% of assets under management in the US.
A combination of trends, including lackluster active management performance, regulation, and increasing cost consciousness, has led investors to move away from actively managed funds and into passive products that track an index.
Vanguard calculated that 82% of actively managed stock funds have either underperformed their benchmarks or shut down over the decade ended December 31, 2015. High costs are the biggest reason active management has lagged, according to Vanguard CEO in a blog post on January 10.
“We believe that the passive phenomena is more appropriately viewed as the adoption of new technology,” said Moody’s vice president Stephen Tu in the report. “Investor adoption of passive and low-cost investment products will continue irrespective of market environment.”
Moody’s reached its conclusions using two approaches: a linear regression of market share versus time and by fitting recent passive fund AUM data to a diffusion model which projects near-term market share.
The Moody’s team led by Tu also see huge potential in growth outside of the US. The rest of the world has seen a smaller penetration of passive investing at approximately 5-15%, according to the report, due to less awareness of passive products or sales practices that don’t favor investors.
Moody’s believes that as markets mature and investors become more aware of the products, there is huge potential for upside.