By Jan Fichtner, Eelke Heemskerk, and Javier Garcia-Bernardo, The Conversation
A fundamental change is underway in stock market investing, and the spin-off effects are poised to dramatically impact corporate America.
In the past, individuals and large institutions mostly invested in actively managed mutual funds, such as Fidelity, in which fund managers pick stocks with the aim of beating the market. But since the financial crisis of 2008, investors have shifted to index funds, which replicate established stock indices, such as the S&P 500.
The magnitude of the change is astounding: from 2007 to 2016, actively managed funds have recorded outflows of roughly US$1,200 billion, while index funds had inflows of over US$1,400 billion.
In the first quarter of 2017, index funds brought in more than US$200 billion – the highest quarterly value on record.
Democratising the market?
This shift, arguably the biggest investment swing in history, is due in large part to index funds’ much lower costs.
Actively managed funds analyse the market, and their managers are well paid for their labour. But the vast majority are not able to consistently beat the index.
So why pay 1% to 2% in fees every year for active funds when index funds cost a tenth of that and deliver the same performance?
Categories: Economics/Class Relations