Thread by @ritholtz

My column on passive vs active published yesterday. It’s a straightforward look at the data behind the Headlines:

“Ignore the hype. Actively managed money dwarfs the assets in low-cost index funds.”

bloomberg.com/opinion/articl…
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The prior headlines are what set me off for this the weeks before:

Bloomberg News “End of Era: Passive Equity Funds Surpass Active in Epic Shift;” bloomberg.com/news/articles/…
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The Wall Street Journal coronation was simply “Index Funds Are the New Kings of Wall Street.”

wsj.com/articles/index…

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The problem with all of the above: It's wrong. Technically accurate but misleading headlines are hype, unsupported by the data about how assets are managed

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The backdrop to this is interesting + quirky.

No one person or organization maintains a definitive data set for world's market capitalization for stocks and bonds.

Tracking down asset data was a bear.

ritholtz.com/2019/10/global…

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U.S. Mutual funds + ETFs = $8.5 trillion

$4.271 trillion in passive index funds vs $4.246 trillion in actively managed ones. (Bloomberg)

Passive market share = 51%

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But Mutual Funds/ETFs are small at $8.5 trillion.

Rest of investment management industry – balance of $35.6 trillion in publicly traded shares SMAs, pensions, foundations, brokerage accounts, direct ownership, hedge funds + sovereign wealth funds are almost all active.

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That dominance of Active management in the U.S. trounces passive by a ratio of 8-to-1 in dollar investments.

Expand that to include the entire world equities, and the ratio is closer to 15-to-1.

Include fixed income in our calculations, the ratio balloons to 60-to-1

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Passive index funds = 12% share of the total US equity market. Double from a decade ago, but far from dominant.

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Passive investing is much less prevalent internationally. A reasonable estimate of non-U.S. index funds ~$1 trillion making global indexed equity capital ~$5.3 trillion worldwide.

This puts the passive market share of global equity at about 6.4%.

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That’s equities.

Now include $102.8 trillion of fixed-income investments.

According to Morningstar, $1.45 trillion of that is in passive bond funds.

In other words the passive share of bonds is only 1.4%.

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Fortune reports passive MF+ ETFs produce “only $11 billion in fees a year; average fee = 0.1%."

Active mutual funds w/almost identical assets, generate >10X that amount = $120 billion in annual revenue.

Add in $45 billion hedge funds fees and you get the broader picture.

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No definitive data set for market cap of global Assets exists. I used Vanguard (equity, fixed income, non-publicly traded company stock); Morningstar (equity, fixed-income flows) @nirkaissar SIFMA @DaveNadig global bond totals, Savills via @jonathanmiller, Fed's Z1 + Russell
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Speaking of RE: $217 trillion in global real estate; about $46 trillion of that is in U.S. residential and commercial real estate.

mcguire.com/blog/2017/04/s…
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Global equities ~$82Trillion; fixed income ~$103T; Real Estate ~$217T = trillions more in currencies, commodities.

By my math = passive share is only 1.4%.

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The rise of passive indexing has been the most significant investment trend of the past decade. It is worth noting, however, that the total amount of money managed passively is a tiny share of the world’s total assets.

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Passive may be making strong strides, but active management is how the vast majority of the world's investment assets are managed today.

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