This ‘surprising’ chart should terrify anyone in the traditional money management business

Exchange-traded funds are hoovering up assets at an impressive rate.

Yes, yes, I know you’ve heard that before. We’ve written about it plenty. The seemingly inexorable rise of these types of funds has everyone on Wall Street talking, with some even describing it as “investor socialism.”

The rise of ETFs has changed stock trading, is having an impact on the number of people employed in fund management, and may also be changing the quality of research produced by investment banks.

A team of analysts at Deutsche Bank led by Brian Bedell did a deep dive on the topic last week, putting out a 240-page analyst note on the topic.

The main conclusion of the note is that the shift in assets from active managers to passive funds is going to continue, regardless of whether active managers get their act together and start delivering improved performance.

That’s at least in part because the shift from active to passive is more of a secular move than a cyclical one.

“We see the ETF product phenomenon as less of an outgrowth of passive investing and more of an adaption of technology and globalization, which are both squarely secular trends,” the note said.

The chart shows the “surprisingly high correlation of 0.97” between ETF AUM growth and the number of worldwide internet users. Correlations, loosely speaking, range between 0 and 1, with a 0 indicating no relationship between two metrics and 1 implying that the two metrics always go hand in hand. A correlation of 0.97 between ETFs and internet penetration, then, implies an incredibly strong relationship between those two trends.

Although correlations certainly do not always prove that one trend is actually causing the other trend, this relationship suggests that the rise of ETFs is tied to deep, long-term, and likely inexorable technological, economic, and social trends. As technology continues to expand its frontiers, traditional money management may not be able to keep up.

In other words, this isn’t a fad. It’s the next technological leap forward in investing.

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