Watching the Migration to Index Funds

Fund flow data consistently shows that dollars have been moving from actively-managed funds to passively-managed funds over the past decade. Beyond seeing the data every quarter, the shift has been evident in the conversations that I have.

Ten years ago, most of the clients that I spoke to were skeptical of index mutual funds and ETFs. I’d have to explain the rationale and evidence supporting index funds.

Five years ago, it was a toss-up whether new client conversations would be spent explaining why we primarily used index funds or explaining why we also had exposure to some higher cost active funds.

These days, new clients are often quick to understand and accept the indexed parts of portfolio recommendations, but I have to explain why specific active funds make more sense for parts of a portfolio.

Although index funds are not always best and certainly not for all parts of a portfolio, they often are the best choice and rarely a terrible choice. Thus, I think greater investor awareness and acceptance of index funds is generally a good thing. It’s been interesting to watch the migration.