Horse Racing

Out of the Shadows: Passive Assets Catch Active

Horse Racing

For years, has been chronicling the rise of index investing. In the past, we've relayed data showing that by late 2018 investment assets in U.S. passively managed large-cap stock funds had surpassed those held by active competitors. 

But an even bigger milestone has taken place. Through April of 2019, according to Morningstar's analysis of U.S. financial markets, for the first time passive domestic fund assets across all equity categories had pulled virtually even with actively managed fund assets.

Just a few months later, the Chicago-based independent research firm updated its fund flow estimates. In its August report, Morningstar found funds tracking domestic stock indexes hit $4.27 trillion in assets, topping actively managed funds with $4.25 trillion as of Aug. 31, 2019.

"This milestone has been a long time coming," Kevin McDevitt, a senior Morningstar analyst wrote. "Over the past 10 years, active U.S. equity funds have had $1.3 trillion in outflows and their passive counterparts nearly $1.4 trillion in inflows." 1

Editors at the Wall Street Journal certainly took note. "The passing of the asset crown is the latest chapter in one of the most dramatic transformations in the history of financial markets," wrote reporter Dawn Lim in a story titled "Index Funds Are the New Kings of Wall Street."2

While pointing out the wave of investors voting with their feet by moving trillions of dollars into index funds, the WSJ article added: "That shift lowered the price of investing for individuals, reduced the influence of stock pickers and turned a handful of Wall Street outsiders into the biggest power brokers in the industry."

By Morningstar's analysis of investment money flowing in and out of the U.S. marketplace, actively managed stock funds -- i.e., open-end mutual funds and exchange-traded funds -- first reshaped the investing landscape by ending April of 2019 with a market share of 50.04%. At the same time, passively managed domestic-focused stock funds finished at 49.96%. In dollar terms, the count had active stock funds with $4.311 trillion in assets and passive domestic funds at $4.305 trillion.3

Such a negligible difference (0.08 of a percentage point) rounded to a statistical tie. "Passive U.S. equity fund assets essentially reached parity with active U.S. equity funds at $4.3 trillion each," Morningstar's McDevitt wrote about April's seachange. 

This development "isn't a surprise given the overwhelming outflows from active U.S. equity funds to passive options over the past 10 years," he noted.

McDevitt also pointed out that active fund managers controlled about 75% of the domestic market a decade ago. "And at that point we were just entering one of the longest bull markets in U.S. history," he wrote. "If you had known this, would you have guessed that active U.S. equity funds were on track to lose $1.26 trillion in outflows?"

Every month, Morningstar collects data on how much in assets each U.S.-based fund takes in. It also analyzes money leaving each fund during these periods. That net amount – how much "inflow" or "outflow" occurs – is recorded and then broken down according to asset classification.

For example, a fund might be categorized as mainly buying small-cap stocks while another lands in the large-cap group. In fixed-income, this data also separates fund investment styles by asset classes such as municipal and taxable bond funds.

In the graphic below, we've dug into Morningstar's database to chart percentage changes in flows during the last full calendar year leading up to this historic period. Besides looking at broad and distinct categories of open-end mutual funds, we've also separated flow numbers between actively managed and passively run funds.

While this movement into indexing is long-term in nature, our idea here is to illustrate how much of an annual percentage change took place by investors favoring one type of fund over the other by the end of 2018 (as compared to a year earlier).

Investors who've been working with IFA's advisors know our investment committee detests following short-term trends. Indeed, Mark Hebner started this fee-only wealth management firm long before indexing became so popular.

From day one, IFA has been required to act as a fiduciary. That means we must put client interests first, not what might make the most money for our independent RIA. In 1999, when we first opened our doors, that primary sense of purpose led Hebner to conclude that investing in low-cost and passively managed funds gave our clients the best opportunity to reach their financial goals.


1.) Morningstar Fund Flows report, Aug. 2019, Kevin McDevitt.

2.) The Wall Street Journal, "Index Funds Are the New Kings of Wall Street," Sept. 18, 2019.

3.) Morningstar Fund Flows report, April 2019, Kevin McDevitt.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There are no guarantees investment strategies will be successful.  Investing involves risks, including possible loss of principal.