As older investors exit the market, capital is rapidly flowing from active funds to ETFs.

According to EPFR data, US actively managed equity funds have outflows of 450 billion US dollars this year, surpassing the historical high of 413 billion US dollars last year. On the other side, the ETF recorded an inflow of 1,700 billion dollars. Passive investments and ETFs are eating away at active funds that once dominated the market.

Analysts said that in recent years, it has been difficult for traditional stock selection funds to justify their relatively high fees because their performance lags behind indices driven by big tech stocks. As older investors, who usually prefer active strategies, left the market, younger savers switched to cheaper passive strategies, speeding up the outflow of funds from active strategies. Morningstar Senior Research Analyst Adam Sabban said:

“The investor base of active stock funds is biased towards the elderly, and new capital entering the market is more likely to flow into index ETFs than active onesMutual funds.”

According to Morningstar data, after taking into account the fees charged by active funds, the core US corporate strategy of active management had annualized returns of 20% and 13% over the past year and five years, respectively. In comparison, similar passive funds had returns of 23% and 14%, respectively. It should be noted that the annual fee rate for active funds is 0.45 percentage points, which is the benchmark for trackingIndex funds9 times 0.05 percentage point.

The stock price performance of actively managed fund companies lags behind

This year, asset management companies with large stock selection businesses, such as Franklin Resources and T Rowe Price in the US, and Schroders and Abrdn in the UK, lagged far behind BlackRock, the world's largest asset management company with large ETF and index fund businesses.

According to Morningstar Direct data, T Rowe Price, Franklin Templeton, Schroders, and the private capital group experienced the largest capital outflow in history in 2024.

Analysts said that the dominance of large US tech stocks makes the situation more difficult for active funds, because generally speaking, the proportion of active funds investing in these companies is lower than the benchmark index. However, the US stock “Mag 7” (Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, Tesla) drove most of the gains in the US stock market this year. Partners Capital founder Stan Miranda stated:

“If you're an institutional investor, you're allocating capital to a very expensive team of talents, and they don't own Microsoft or Apple because it's hard to show real insight into a company that is studied and owned by everyone. So they usually focus on smaller, less focused companies, and as a result, they all under-rated 'Mag 7'.”

The ETF industry is booming

According to ETFGI data, investors injected $1.7 trillion into ETFs this year, increasing the industry's total assets by 30% to a record $15 trillion.

Analysts pointed out that this increase was mainly due to the S&P 500 index rising by about 25% during the year, as well as investors' recognition of US assets. Brian Hartigan, head of ETFs and indices at Invesco, said:

“Investors have clearly regained their confidence this year, and market sentiment is biased towards risk.”

According to reports, many traditional mutual fund companies, including Capital, T Rowe Price, and Fidelity, are trying to attract the next generation of customers by repackaging active strategies into ETFs.