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.

Meanwhile, Fidelity recorded the second-highest inflows of $7.6 billion in January. The firm's $9.8 billion in passive inflows far outpaced $2.2 billion worth of outflows from active funds.

3 Best Choices

We have, thus, selected three passive mutual funds with a Zacks Mutual Fund Rank #1 (Strong Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

SEI S&P 500 Index F (SIMT) SSPIX invests 80% of its assets in securities of companies listed on the S&P 500 index across a wide range of industries. The fund seeks to achieve investment results which correspond to the average price and dividend performance of companies from the S&P 500 index.

This Zacks sector – Index product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

SSPIXhas an annual expense ratio of 0.29%, which is below the category average of 0.95%. The fund has three and five-year returns of 13.6% and 10.4%, respectively.

Vanguard Mid-Cap Value Index Investor VMVIX tracks the performance of CRSP US Mid Cap Value Index, which in turn measures the return on investment from mid-cap companies. The fund invests the lion’s share of its assets in securities of companies from the CRSP US Mid Cap Value Index.

This Zacks sector – Index product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VMVIX has an annual expense ratio of 0.19%, which is below the category average of 1.09%. The fund has three and five-year returns of 11.6% and 8.2%, respectively.

Schwab Fundamental Emerging Markets Large Co Index SFENX invests the majority of its assets in securities of companies listed on the Russell RAFI Emerging Markets Large Company Index. The fund seeks to achieve investment results which correspond to the average total return from companies constituting the Russell RAFI Emerging Markets Large Company Index.

This Zacks sector – Index product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

SFENX has an annual expense ratio of 0.39%, which is below the category average of 1.36%. The fund has three and five-year returns of 20.3% and 5.1%, respectively.