The shift has been going on since 2006, with money flowing out of active and into passive every year since then. It’s taking place as a growing number of investors realize that highly paid money managers are seldom able to beat broad benchmarks of stock market performance. More than $39 billion of cash went into passive US equity funds last month, compared with $22 billion for their active counterparts.
When it comes to passive investments, can there be too much of a good thing? A concern is that, if too much money flows into funds that simply track an index, markets will become inefficient, and prices will no longer reflect the underlying value of specific assets. It’s worth remembering that many passive funds are used actively, with investors and traders buying and selling them regularly to rebalance their portfolios. Indexes have become a way for some investors to pursue individualized strategies.