Passive investing to overtake active by 2024 or sooner

Feb 09, 2017
<p>Moody&rsquo;s research predicts continuing rise in $6 tn market</p>

Passive investments, such as exchange-traded funds and index funds, are set to achieve a leading share of the US market in the next seven years – or sooner – according to Moody’s Investors Service.

Passive investments currently account for $6 tn of assets globally and 28.5 percent of assets under management in the US, according to the credit ratings giant. Moody’s says the US figure is poised to pass 50 percent in the next four to seven years.

‘We believe the passive phenomenon is more appropriately viewed as the adoption of a new technology,’ says Stephen Tu, vice president and senior analyst at Moody’s, in a press release. ‘Investor adoption of passive and low-cost investment products will continue irrespective of market environments, and we estimate that passive investments will overtake active market share sometime between 2021 and 2024.’

The firm reached its conclusions using two approaches: a linear regression of market share versus time, and by fitting recent data on passive fund assets under management to a diffusion model that ‘projects near-term market share,’ Moody’s says. The firm also predicts that developments in smart beta investing and multifactor funds will see these areas become ‘the next hotspot for investor dollars’, leading the industry ‘into a lower-cost environment of active management.’

At the same time, Moody’s notes the rise of robo-advisers, which it says are ‘on the cusp of gaining significant traction as financial and investment technology improves.’

While the growth of passive investing has been rapid in the US, however, the rest of the world has yet to catch on, with an estimated 5 percent to 15 percent penetration. But Moody’s believes that as markets mature and awareness of passive products increases, this will change.

‘Over time, we expect passive adoption in the EU and Asia to follow a pattern similar to the US, provided that global transparency and communication improves and that global financial markets continue to mature and become more investor-friendly,’ explains Tu.

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