ETFs Surpass Active Management

I started converting all of my clients to Exchange Traded Funds {ETFs}back in 2005.  I did this after noticing that ETFs had fared far better during the 2001-03 bear market than many individual stocks.  Back then I was one of the very few advocating these as an investment strategy.  Most investment professionals still preferred individual portfolios of stocks or mutual funds.  

Now times have changed and passive investing using ETFs is much more accepted than it was back then.  To that end I encourage you to go read the article, "End of Era:  Passive Equity Funds Surpass Active in Epic Shift".  The article chronicles the long shift away from active management into passive investment strategies which rely heavily on ETFs.  Such success breads jealousy and there are many that have claimed if not the death of passive investment strategies, which are how most ETFs are composed, but that ultimately investors that rely heavily on this type of investing will get their comeuppance.  Many that proclaim this also predict a brand new era for active managers which is often said to be just around the corner.  Of course most of the people predicting these things are active managers themselves.  

ETFs in general have performed exactly as they are advertised in every market pullback we've seen since their inception.  That is they mimic the underlying index they are meant to represent.  They will go up or down depending on how their underlying index performs but the tracking errors for major indices has been minimal and so far none of the major indices or the major firms that control these indices has seen a major issue.  The same cannot be said for common stocks, many mutual funds or many active managers.  Many active managers are closet indexers at heart.

I think it is too soon to say where we are in the ETF revolution.  Yes ETFs have come a long way but according to the article which quotes the Investment Company Institute "US stocks held in passive and active funds combined represent less than one-third of the total market, with the balance owned by individuals, pensions, insurers and other investors".  If that statement is correct then by all accounts we may not be in the early innings of this sea change, but we're also probably not late to the party.

Back Thursday.