Active is represented primarily by the $13.5 trillion mutual fund industry, which is populated heavily with managers who move in and out of positions to try to beat market benchmarks such as the S&P 500. On the other side, the $2.4 trillion exchange-traded fund industry tracks indexes with offerings that carry much lower fees and trade like stocks, providing more liquidity than mutual funds.
Active mangers haven't done much to boost their cause. Just 19 percent beat the large-cap Russell 1000 in 2016, according to Bank of America Merrill Lynch, giving further fuel to the exodus.
"Certainly for the smaller investors and the long-term investors, the passive strategies are more comfortable and seem to make more sense," said Carol Roth, partner at Intercap Merchant Partners. "The active traders have not proven that they're worthy of the allocations."
All the money flowing toward indexing, though, has generated some critics who believe passive investors are ignoring risks. Passive investing offers fewer opportunities to generate "alpha," or the ability to beat benchmarks, and offers little downside protection. When the market falls, investors tracking indexes can lose money unless they're properly diversified.
The question, then, is whether the investing community is reaching "peak passive" — a high-water mark for the popularity of passive funds.
"If you use the magazine headline indicator, then certainly we are at peak passive," said Nick Colas, chief market strategist at Convergex. "Everyone has chiseled out the tombstone for active management."
Colas believes conditions are changing that could lead to better times for active managers.
Specifically, he said correlations, or the tendency of stocks to move up and down together, are breaking down after years of exceeding 90 percent. The prevalent correlation trend has made it difficult for stock pickers to find the price differences that lead to alpha generation.
With market volatility increasing, that could lead to better conditions for active management. Indeed, the year closed with a somewhat better performance, as 37 percent of managers beat the benchmark in the fourth quarter, according to BofAML.
"The missing piece is going to be more active managers outperforming. That's going to take time only because we literally just had the breakdown in correlations two months ago," Colas said. "Investors will want to see at least a quarter or two of outperformance before they start shifting allocations."