2013: A Record Year for Indexing


At Index Fund Advisors, we are always delighted to see articles such as this one from which shows the unabated march of indexing across the investment universe. For 2013, investors poured in a record $115 billion into index mutual funds, almost double the previous high. This dwarfs the $38.3 billion that was gathered by actively managed funds, according to the Investment Company Institute. Additionally, exchange-traded funds, most of which track indexes, took in a whopping $180 billion. Spokesmen from Vanguard and Charles Schwab attributed the bulk of the inflows to deposits in 401(k), which are increasingly gravitating towards index funds.

This overall trend towards indexing is something we have taken note of in many prior articles. You may recall that 2013 saw the 40th anniversary of indexing, and it culminated in the awarding of the Nobel Prize in Economic Sciences to Eugene Fama, the intellectual father of indexing. For us, the reasons for the ascendancy of indexing are as clear as day—markets work and costs matter. Unfortunately, since that simple message does not sell magazines or CNBC airtime, we will continue to see articles with titles such as "Ten Hot Stocks to Buy Now", and we will be here to refute them.

One very important piece of ammunition against active management and a report that we eagerly anticipate is the updated Standard and Poor's Index versus Active Scorecard. For the five years ending 6/30/2013, 79.8% of actively managed domestic equity funds were beaten by their benchmarks. Since the last two quarters of 2013 were very strong for the market, all the actively managed funds with substantial cash positions would have faced strong headwinds, so we will not be surprised if an even worse number shows up for 12/31/2013. We will definitely keep you posted.

If you would like to learn more about the benefits of working with a registered investment advisory firm that is now in its 15th year of operations during which it has never wavered from  its strategy of pure indexing, please call us at 888-643-3133.