2014 was a huge year for passive investing.
A report in The Wall Street Journal on Monday said that Vanguard Group, the biggest provider of low-cost index funds, or funds designed to track certain stock and bond indexes, saw inflows of $US216 billion in 2014.
The Journal notes that this a record yearly inflow for any mutual fund firm.
A major part of Vanguard’s attraction is the fees the firm charges, with the Journal noting that Vanguard charges about 18 cents for every $US100 invested with the firm, compared to $US1.24 charged by most mutual funds.
And while the Journal’s report said, “the merits of passive investing are becoming conventional wisdom among retail investors,” not everyone is convinced that passive investing is the “sure thing” some might believe.
Is It Really “Passive” Investing?
In December, we highlighted comments from Cullen Roche at Pragmatic Capitalism that said passive investing really looks a lot like active investing.
Roche noted that Jack Bogle, the founder of Vanguard and the so-called “father of passive investing,” said that he preferred not to invest outside of the US, which Roche noted excludes about half of the world’s investable stock markets.
As Roche wrote:
I think Bogle is dead wrong here. Not only is he contradicting his own “passive” view on asset allocation, but he’s using an approach that assumes that the USA will be the dominant market just because the recent past has told us so.
Back in the summer, we highlighted this chart from Thornburg Investment Management, which showed the “real real return” that investors earn over time after you net out fees, taxes, and inflation. And it is these kinds of illustrations showing how investors “stealthily” lose money over time that has, in part, led to the popularity of passive investing strategies.
The rise in the stock market also plays a role in the popularity of low-cost or passive strategies.
The Journal noted that in 2014, 74% of actively-managed stock funds underperformed their benchmark. Meanwhile, 2014 marked the third straight year that the S&P 500 saw double-digit gains, with last year’s gains in particular coming as a surprise.
And so as investors see the S&P 500 rising by double-digits, and their stock funds more than likely underperforming, all aspects of that investment — particularly fees — are likely to come under scrutiny.