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Index Funds to Overtake Active in U.S. by 2021, Moody's Says

The transition of power has picked up in recent years as consumers turn to cheaper products that track indexes instead of relying on a fund manager’s stock-selection prowess.

By Annie Massa

(Bloomberg) --Another sign of decline for stock-pickers looms within two years, according to Moody’s Investors Service.

Passive investing in the U.S. is on pace to surpass active by 2021, Moody’s said Thursday in a report. The transition of power has picked up in recent years as consumers turn to cheaper products that track indexes instead of relying on a fund manager’s stock-selection prowess.

Greater investment in passive products is “akin to the adoption of an improved technology,” according to the report.

It would be a watershed for the investing industry if index-based mutual funds and exchange-traded funds overtake their active counterparts in assets. Last year brought the largest annual outflows from actively run funds in the Investment Company Institute’s data set, the report said. The trend is spreading outside the U.S. too: the share of passive assets in Europe will rise to about 25 percent by 2025 from 14.5 percent in 2018, Moody’s predicts, as ETFs become a core holding for more institutional investors.

Other measures are showing persistent outflows from active funds. Investors had $2.93 trillion in large-cap equity funds tracking indexes as of Dec. 31, compared with $2.84 trillion in analogous active funds, according to data from Morningstar Inc. Those lines crossed in the fourth quarter.

 
To contact the reporter on this story: Annie Massa in New York at [email protected] To contact the editors responsible for this story: Margaret Collins at [email protected] Josh Friedman, Melissa Karsh

TAGS: Mutual Funds
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