U.S. mutual funds and exchange-traded funds gathered $79 billion in 2023. While that represented a rebound from a historically poor 2022, it was equivalent to the second-lowest positive organic growth rate in Morningstar’s data beginning in 1993. Year-to-date flows were negative through October. Investors plowed $57 billion into U.S. funds in December, the largest monthly sum of the year.
Annual Long-Term U.S. Organic Growth Rates
It’s Official: Passive Funds Overtake Active Funds
After steadily encroaching on active funds’ turf for years, passive funds closed 2023 with more assets. While U.S. equity flows have long favored passive products, international-equity and bond-fund flows have followed suit, helping to get passive funds over the hump.
Historical Fund Assets: Active vs. Passive
Index Fund Phenomenon Is in Cruise Control
Active bond funds pulled in more dollars on a net basis than passive counterparts for years until 2013. They haven’t achieved that feat in a calendar year since. International-equity fund flows began favoring passives in 2008, and U.S. equity fund flows first turned that way in 2005. It’s been one-way traffic over the past decade.
Historical Active vs. Passive Flows by Category Group
Flight to Passive Impacts Category Flows
Because the largest and most prominent passive equity funds own the broad market, flows into blend-style categories have been the strongest. Conversely, value and growth categories tend to lean toward actively managed strategies, predisposing them to outflows. The active-to-passive undercurrent complicates the fund flow investment signal at times.
Equity Category Organic Growth Rates and Assets
The Push-Pull of Market Performance and Rebalancing
A hot year for stocks expanded equity funds’ share of total U.S. fund assets, but that wasn’t all that different from prior years. Investor activity in aggregate is typically reflective of rebalancing. That was evident in 2023, as taxable-bond funds took in more than $200 billion, while U.S. equity and sector-equity funds posted outflows and international-equity funds took in meager inflows
Historical Asset Share of Equity Funds vs. Fixed-Income Funds
Active Outflows Offset Passive Inflows in Weak Year for U.S. Equity Funds
Investors were net buyers of U.S. equity funds in 2022′s horrendous market, but that reversed in 2023 as stocks recovered. U.S. equity funds saw about $14 billion leave in 2023. As usual, passive U.S. equity funds took in a large sum ($244 billion), while active funds suffered widespread net outflows ($257 billion). Active funds shed assets across all nine U.S. equity categories in 2023. Large-value funds suffered their worst year on an organic-growth basis since 2000.
2023 U.S. Equity Category Flows
Taxable-Bond Funds Storm Back in 2023
Rising interest rates sent bond investors fleeing in 2022, but higher yields and prospects of future rate cuts brought inflows in 2023. Taxable-bond funds gathered about $220 billion on the year, a healthy sum but one that fell well short of the $400-billion-plus annual inflows from 2019 through 2021. Investors got spooked when rates peaked in the fall but otherwise were steady net buyers.
Taxable-Bond Flows in 2023
The Usual Suspects Dominated Fund Family Flows
IShares gathered about $107 billion in 2023 to lead all fund families. State Street and Vanguard weren’t far behind. J.P. Morgan deserves a nod given its fourth-place finish and focus on active funds. But the times belong to passive-investing titans whose market share continues to steadily climb. As of December 2023, nearly 30% of U.S. fund assets sat with Vanguard.
Historical Fund Family Market Share
This article is adapted from the Morningstar Direct U.S. Asset Flows Commentary for December 2023. Download the full report here.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
Actively managed funds' recent surge did little to change their long-term track record. Less than one out of every four active strategies survived and beat their average passive counterpart over the ten years through December 2023. One type of active investment strategy generally trails in long-term success rates.
Active funds strive for higher returns and come with higher costs and risks. Passive funds offer steady, long-term returns at lower costs but carry market-level risks. Explore key differences between active and passive funds in this blog.
It took several years for passive strategies to gain traction, but investors have wholeheartedly embraced them. Simply put, investors understood that they can achieve market returns for virtually no cost while active managers hadn't proven their ability to add incremental return worth their higher fees.
Passive share of investing continues to rise, reaching over 50% of total assets managed in December 2023. Passive investing can potentially break the market by disrupting price discovery and causing stock prices to no longer reflect investor views.
Setting the odds in favor of winning active fixed income managers. Vanguard believes in both active and passive investing, but our faith in active is contingent on managers meeting a number of criteria.
Passively managed index funds face performance constraints as they are designed to provide returns that closely track their benchmark index, rather than seek outperformance. They rarely beat the return on the index, and usually return slightly less due to operating costs.
Active Income has time constraint as long as we can work, while we can earn Passive Income even if we cannot work anymore. Active Income is the way we work and receive returns almost immediately, such as earning wages, while Passive Income takes a long time to generate income.
While the headlines have been drumming on about the demise of active management for years – a slow death against the rise and rise of index investing – some have brushed it off as merely cyclical pressure, with literature suggesting the forward-looking environment will be more favourable for stock-pickers.
As this week's chart shows, however, almost no active fund manager consistently beat the benchmark, at least not over five-year periods. This is unexpected given that active fund managers can use their expertise and research to pick the winners and weed out the losers.
A: Buffett believed in the long-term efficiency and lower costs of passive investment strategies, specifically index funds, over actively managed hedge funds.
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How are they managed? While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed. Active mutual funds are managed by fund managers.
More than a third of active equity managers outperformed passive counterparts over the last one-year period. Active bond managers did even better, with 62.7% on average outperforming their passive alternative.
Among the benefits of passive investing, say Geczy and others: Very low fees – since there is no need to analyze securities in the index. Good transparency – because investors know at all times what stocks or bonds an indexed investment contains.
It's true that over the short term, some mutual funds will outperform the market by significant margins - but over the long term, active investment tends to underperform passive indexing, especially after taking account of fees and taxes.
A new study from Eaton Vance found that actively managed bond funds consistently outperformed their passive peers in the last decade. The study evaluated 327 bond mutual funds across nine Morningstar fixed-income categories. Over a 3-, 5-, and 10-year period, active bond funds collectively outperformed passive.
Introduction: My name is Aracelis Kilback, I am a nice, gentle, agreeable, joyous, attractive, combative, gifted person who loves writing and wants to share my knowledge and understanding with you.
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