As older investors exit the market, funds are rapidly flowing from active funds to ETFs.
According to EPFR data, this year, U.S. actively managed equity funds saw outflows of $450 billion, surpassing last year's historical high of $413 billion. On the other hand, ETFs recorded inflows of $1.7 trillion. Passive investing and ETFs are eating away at the active funds that once dominated the market.
Analysts say that in recent years, traditional stock-picking funds have struggled to justify their relatively high fees, as their performance lags behind indices driven by large tech stocks. With older investors, who typically prefer active strategies, exiting the market, younger savers are turning to cheaper passive strategies, accelerating the outflow of funds from active strategies. Adam Sabban, a senior research analyst at Morningstar, stated:
<blockquote>
“The investor base for actively managed equity funds tends to be older, and new money entering the market is more likely to flow into index ETFs rather than actively managed mutual funds.”
</blockquote>
According to Morningstar data, after accounting for the fees charged by active funds, the annualized returns for actively managed core U.S. large-cap strategies over the past year and five years were 20% and 13%, respectively. In contrast, similar passive funds had returns of 23% and 14%. It is worth noting that the annual expense ratio for active funds is 0.45 percentage points, which is nine times that of benchmark index funds at 0.05 percentage points.
<h2>Performance of Active Management Fund Companies Lags Behind</h2>
This year, asset management companies with large stock-picking businesses, such as Franklin Resources and T Rowe Price in the U.S., as well as Schroders and Abrdn in the U.K., have significantly underperformed compared to the world's largest asset management company, BlackRock, which has substantial ETF and index fund businesses.
According to data from Morningstar Direct, T Rowe Price, Franklin Templeton, Schroders, and the private Capital Group experienced the largest outflows in history in 2024.
Analysts say that the dominance of large U.S. tech stocks makes the situation even more difficult for active funds, as, generally speaking, active funds have a lower allocation to these companies compared to benchmark indices. However, the &#34;Mag 7&#34; (NVIDIA, Apple, Microsoft, Alphabet, Amazon, Meta, Tesla) has driven much of the gains in the U.S. stock market this year. Stan Miranda, founder of Partners Capital, pointed out:
<blockquote>
“If you are an institutional investor, you would allocate funds to very expensive talent teams that do not hold Microsoft and Apple, because it is difficult to demonstrate true insight on companies that are widely researched and held by everyone. So they typically focus on smaller, less-followed companies, resulting in underweighting the 'Mag 7.'
</blockquote>
<h2>The ETF Industry is Thriving</h2>
According to data from ETFGI, investors have injected $1.7 trillion into ETFs this year, resulting in a 30% increase in total assets for the industry, reaching a record $15 trillion.
Analysts point out that this growth is primarily due to the S&amp;P 500 index rising approximately 25% over the year and investors' recognition of U.S. assets. Brian Hartigan, Head of ETF and Index Investments at Invesco, stated:
<blockquote>
&#34;Investors have clearly regained confidence this year, and market sentiment is leaning towards risk.&#34;
</blockquote>
It has been reported that many traditional mutual fund companies, including Capital, T Rowe Price, and Fidelity, are trying to attract the next generation of clients by repackaging active strategies as ETFs.
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The market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk

MORN

U.S. actively managed funds experienced an outflow of $450 billion this year, setting a new historical high, while ETFs attracted $1.7 trillion in inflows. As older investors exit, younger investors are more inclined towards low-cost passive investment strategies, leading to an acceleration in the outflow of actively managed funds. Data from Morningstar shows that the annualized return of actively managed funds is lower than that of passive funds, with fees reaching 0.45 percentage points, significantly higher than the 0.05 percentage points of index funds. Meanwhile, asset management companies with actively managed fund businesses have seen poor stock performance

- As older investors exit the market, there is a significant shift of funds from active funds to ETFs, with U.S. active equity funds experiencing a record outflow of $450 billion this year.  
- In contrast, ETFs saw inflows of $1.7 trillion, driven by the strong performance of major tech stocks, which has made it difficult for active funds to justify their higher fees.  
- Analysts note that the dominance of large tech companies has led to underperformance in active funds, prompting a trend towards cheaper passive strategies among younger investors.

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450 billion outflow vs 1.7 trillion inflow, U.S. active funds suffered greatly, ETFs are the big winners