Indexed Products Aren’t All Passive

This week Morningstar Inc. released a report which estimated that as of August, in the United States, assets invested in indexed products (either mutual funds or exchange-traded funds) have now eclipsed that of assets being managed by traditional active stock pickers. In last week's issue, we looked at debunking the myth that passive investing is a “bubble”, but that it is also worth meditating on whether the trend towards lower-cost indexed products is sustainable at this current pace. Bloomberg released an article this week that highlighted some of the key points of the Morningstar report, and given that indexed products cost about a tenth of what active funds charge, this represents investors keeping more of their own money.” The senior analyst from Morningstar that assembled the report attributes the relentless flow of funds into indexed products as investors being more tolerant of adopting “set it and forget it” type investment strategies. We will note that just because investors are choosing to use indexed-based products, doesn’t make them passive. However, the combination of lower cost solutions aligning with more rational investor behaviour will be a strong force to overcome. Indexed products have been around for a long time, and have survived many market cycles that included gut-wrenching crashes, so it would be surprising if the next major downturn can materially alter investor behaviour.