Passive index funds now own a bigger chunk of US stocks than active funds for the 1st time

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  • Passively managed index funds have hit a milestone by overtaking actively managed funds in US stock ownership.
  • Passive funds held 16% of US stock market cap, compared with 14% for active funds, at the end of 2021.
  • More than $2 trillion has flowed from active to passive funds over the last 10 years, ICI research found.

Passively managed index funds now own a bigger share of the US stock markets than actively managed funds for the first time, according to new data from the Investment Company Institute.

At the end of 2021, passive index funds that focus on shares in US corporations accounted for 16% of US stocks by market capitalization, ICI’s research found. 

At the same time, actively managed funds held 14% by market value, meaning the typically lower-cost passive products have overtaken that segment for the first time.

Both types of funds still lag the big investors — such as hedge funds, pension funds, life insurance companies, and individuals — which held 70% of US equities by value.

The unflagging rise of passive index funds — which track a particular index by holding all the assets in it or a sample of them — has seen them amass trillions of dollars in assets ever since Vanguard’s Jack Bogle began offering the buy-and-hold investment strategy in the 1970s.

Those gains have been at the expense of actively managed mutual funds. In the last decade, more than $2 trillion has flowed from active to passive funds, mainly to index exchange-traded funds (ETFs), according to ICI. The situation was reversed 10 years ago, when 20% of stocks were held by active funds and 8% by passive ones.

But Cathie Wood — who runs active investment management firm Ark Invest — and Tesla CEO Elon Musk are among those who agree the rise of passive investment has gone too far. Wood has described the shift to passive investment as a “massive misallocation of capital.”

Wood argued that investors in passive funds are primed to miss out on massive returns on particular stocks, such as a 400-fold gain in Tesla shares logged before the stock was added to the S&P 500.

Despite this, demand for index funds in all assets is rising, and this has helped put a bigger share of these assets in the hands of the five largest US fund companies, ICI found. These accounted for 54% of the industry’s total assets last year, while the 10 largest oversaw 83% of all assets.

“The increased concentration reflects the growing popularity of index funds — the 10 largest fund complexes manage most of the assets in index mutual funds,” ICI said in its 2022 fact book.

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