Investors Shift From Stocks To Passive Mutual Funds: 3 Picks

Stocks have started losing their attractiveness to funds that track the broader market indices. Also called passive mutual funds, these have lately witnessed a spectacular inflow of money. As a matter of fact, investors have more money parked in such funds compared to actively managed ones.

This trend gathered steam in the fourth quarter of last year. Per Morningstar, passive mutual funds, exchange-traded funds (ETFs) and smart beta funds together held $2.93 trillion in assets as of Dec. 31, 2018. In comparison, actively managed funds had $2.84 trillion of assets under management as of the last day of 2018.

Right Time to Invest in Index Funds

The primary reason behind investors rotating out of stocks to passive funds is that stocks that have higher prices struggled to beat market expectations lately. Such bearishness in equity markets can be countered by parking money into index-tracking funds.

It is widely expected that inflows in passive funds which track U.S. stocks of all sizes will surpass active funds by the end of 2019. For the record, only about 24% of all active funds could surpass passively managed ones over the past 10 years. After analyzing 4,600 mutual funds with around $12.8 trillion in assets, Morningstar concluded that in the long-term horizon, foreign-stock and bond funds were more successful compared to U.S. large-cap funds.

Fund Houses Benefit From Strong Inflows

Per Morningstar data for fund inflow in January 2019, taxable bond funds experienced record-breaking inflows of $31.5 billion in the month. January also marked the category’s best month since January 2018. Further, passive taxable-bond funds witnessed inflows of $27.6 billion in the month, with Vanguard Total Bond Market II Index VTBIX leading funds from the category.

Vanguard led the category with about $19.7 billion alone in inflows. The fund house gained from the shift toward passive bond funds. Also, Vanguard experienced inflows worth $7.1 billion into its passive investment vehicles from the intermediate-term bond class.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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