The migration to low-cost passively managed funds has been massive in the last 10 years. The annual inflows into passive funds surpassed those into active for the first time in 2004, and the trend has accelerated since the financial crisis. There is currently $3.8 trillion of assets in actively managed funds and $2.5 trillion in passive.
If fund flows continue at the current pace, passive fund assets could exceed active in as little as five years, suggested Strauts. "There will always be active management, but it's pretty clear that active will be a smaller part of the market than passive at some point in the near future," he said.
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The biggest factor in the outperformance of passive indexing is not the failure of active strategies as much as the high costs that come with them.
"Cost may be the best predictor of long-term performance," said Jim Rowley, a senior investment analyst at Vanguard Group, a pioneer of low-cost indexing. "It's not that active strategies can't beat passive ones, but they can't overcome the cost advantage of indexing."