Is Passive Growing Actively?

Global events this year have been transitional in nature, signaling change.  Examples of significant developments include the result of the Brexit vote, with the UK officially set to leave the EU and the new Prime Minister, Theresa May, preparing for upcoming changes, as well as the 58th U.S. Presidential election, which is empowering electors to choose their 45th president.

We are witnessing changes in passive investing as well.  Q3 2016 reached a record high USD 3.408 trillion in ETF/ETP assets listed globally.  Third quarter statistics showed the global industry at 6,526 ETFs/ETPs, with 12,386 listings from 284 providers listed on 65 exchanges in 53 countries.[i]

This growth in passive investing has been fueled by a number of factors, including technology, regulation, costs, and doubts about the persistence of active fund manager performance.  Economies of scale and advanced technology have put fees under pressure.  Increased transparency and regulation have also set the ball in motion.  There appears to be a growing realization of the scope of products and options that passive routes can provide, along with growing popularity of smart beta and factor investing.

ETFs are an innovation that potentially lower costs as a result of fewer intermediaries, reduced administration expenses, lower marketing costs due to the availability of online platforms, and a move toward increased automation.  Robo-advisory has also become more prominent, and index-based investing may be the greatest beneficiary.

Pure passive strategies are now being challenged with lower a cost, which aids the implementation of core-satellite strategies.  Many market participants use this strategy to manage their investment strategy, either keeping their core passive and satellites active or vice versa.

In India, the trend of passive investing is growing.  Although market conditions are still offering alpha to active fund managers, some market participants are moving toward index-based investing. We are seeing this shift if they are interested in market beta or a passive approach, to apply certain investment selection factors in order to offer differential options.

The growing scope of passive investing could increase the smart beta space.  Global assets in smart beta have seen growth of nearly 40% from 2010 to 2015.[ii]  Smart beta investing, simplistically defined as investment strategies that consider factors such as low volatility, quality, momentum, value, etc., may provide low cost and transparent, easy access to return that was previously believed to be available from active management only.

So can we expect an actively growing passive space?  Let us wait and watch.



The posts on this blog are opinions, not advice. Please read our disclaimers.

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