Passive investing has changed Wall Street forever, driving costs down for mum-and-pop investors.
It’s also causing problems for the active money managers who are struggling to compete. Mutual fund managers, who charge fees to pick investments, are struggling to justify their cost. And some of the biggest hedge fund managers say the massive amounts of money flowing into passive strategies is changing how they invest.
The trend has only just begun, according to the head of the world’s largest manager, BlackRock CEO Larry Fink.
“Index and ETFs still only represent 10% of the entire equity market global capitalisation,” Fink said Monday, July 17, on his firm’s second quarterly call, referring to funds that passively track the markets.
“With $US160-odd trillion global equity market capitalisation, we have much more opportunities for ETFs to grow, not just on equities, but in fixed income. And I believe this is just the beginning.”
BlackRock is one of the big winners as investors shift away from active management. Among the reasons, according to a Credit Suisse analysis also released Monday, are new regulations, such as the Department of Labour’s fiduciary rule. That new standard requires financial advisers who oversee retirement money to act in the best interest of their clients.
BlackRock manages $US5.7 trillion, far outpacing competitors, and took in a record $US94 billion in new money in the second quarter of this year.
BlackRock isn’t the only passive heavyweight that is raking in fresh assets.
Vanguard, which pioneered passive investing, pulled in more than 8.5 times its mutual fund competitors over the past three calendar years, according to a recent New York Times report. The firm manages about $US4 trillion.
Jack Bogle, Vanguard’s founder, has said that only the best active managers are going to be able to stay in business.
“The active managers have their work cut out for them,” Bogle told Business Insider in an interview earlier this year.