US Passive Funds Reach $13.3 Trillion... Surpass Active Funds for the First Time

For the first time in the United States, the assets under management of passive funds have surpassed those of active funds. This is attributed to the high preference among individual investors and the popularity of index-tracking ETFs.

On the 18th (local time), major foreign media outlets cited data from global investment analysis firm Morningstar, reporting that as of the end of December last year, passive mutual funds and ETFs in the U.S. held $13.3 trillion (approximately 17,748 trillion KRW) in assets, while active ETFs and mutual funds held $13.2 trillion (approximately 17,614 trillion KRW).

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Looking at net changes last year, $450 billion (approximately 600 trillion KRW) flowed out of active funds, whereas passive funds saw an increase of $529 billion (approximately 706 trillion KRW).

According to financial research firm Cerulli Associates, just ten years ago, the size of passive fund assets accounted for only about one-quarter of the U.S. mutual fund and ETF market. However, in recent years, except for occasional exceptional performances, passive funds have consistently outperformed active funds.

Passive funds first appeared in the market in 1976 when Vanguard launched the world's first index mutual fund. Unlike active funds, where fund managers actively construct portfolios, passive funds track major indices. Warren Buffett, CEO of Berkshire Hathaway and known as the "investment genius," has repeatedly criticized Wall Street's high fees in shareholder letters and emphasized the advantages of index funds. Index funds are a representative type of passive fund.

Matt Abkarian, Vice President of Product Development at Cerulli, said, "It is not necessarily that individual investors dislike active funds and only prefer passive funds. It means asset managers are changing the way they work and using more passive funds." He added, "Considering alternative investments such as private equity and hedge funds, active investment assets still account for about 70% of the market."

The steady increase in passive fund management in the U.S. fund industry is largely due to the role of ETFs. ETFs hold securities like mutual funds but can be bought and sold on exchanges like stocks, offering high liquidity. Between 2019 and 2023, investors poured $2.5 trillion (approximately 3,337 trillion KRW) into passive ETFs. In the past year alone, $600 billion (approximately 801 trillion KRW) was invested. During the same period, $400 billion (approximately 534 trillion KRW) flowed into passive mutual funds.

Despite the widespread popularity of passive funds and ETFs, foreign media evaluated that changes at the top of asset rankings occur in active ETFs. According to Morningstar, active ETFs account for less than 10% of U.S. ETF assets but earned $126 billion (approximately 168 trillion KRW) last year. This represents more than 20% of the total inflows into the U.S. ETF market last year.

Todd Rosenbluth, Head of Research at consulting firm BetaFi, said, "Many people have realized that to outperform benchmark indices, you just need to follow the benchmark." He added, "Although interest in active ETFs has recently increased, index-tracking ETFs remain a core component of most portfolios."

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