A buoyant start to the stock market in 2017 couldn't stop investors from ditching actively managed funds.
The trickle away from stock pickers and toward indexes has turned into a flood, with more than half a trillion dollars heading into passive funds over the past 12 months, according to Morningstar.
Active management in total saw $13.6 billion in outflows for January, mitigated only by net inflows to bond funds, Morningstar said. U.S. equity saw $20.8 billion in outflows, bringing passive management closer to parity when it comes to domestic stock funds.
By contrast, passive management saw just shy of $77 billion in inflows. U.S. equity funds, which track broad indexes like the S&P 500 and its sectors and subsectors, pulled in $30.6 billion for the month.
Overall, actively managed U.S. equity funds now hold $3.6 trillion in assets while their passive counterparts hold nearly $3.1 trillion. All classes of passive funds have seen inflows of $563 billion over the past year, while active funds have suffered $325.6 billion in outflows.
"The massive exodus from actively managed U.S.-equity funds continued in January," Alina Lamy, Morningstar's senior analyst for quantitative research, said in a statement. "The tidal wave is showing no signs of stopping, threatening all but a select few and making active investing a dangerous ocean to swim in."
The moves happened despite a strong January stock market that saw the gain 1.8 percent.
Vanguard has been a major beneficiary of the move to passive.
In 2016, the firm saw more net inflows than all of its competitors combined — $289 billion to $244 billion, Morningstar said. The firm took in another $46 billion in January that included $43.7 billion to passive products, a gain that pushed the firm past the $4 trillion mark in total assets under management.
Its next-closest competitor was BlackRock, which saw just shy of $14 billion in net inflows for the month.
"We are pleased that investors continue to gravitate to the Vanguard way of investing," Vanguard spokesman John Woerth said. "We firmly believe that our low-cost, disciplined, balanced investment approach gives our clients the best chance for long-term investment success."
Lamy pointed out that most months have seen red numbers for just about all firms in active management, but that was not the case in January. Along with Vanguard, which led the way at $2.3 billion, American Funds, Pimco, State Street and T. Rowe Price all showed active inflows, albeit in small numbers.
Leading asset management firms have been in a prolonged price war, fighting the trend to passive by lowering fees across the board and expanding their offerings in the burgeoning $2.7 trillion exchange-traded products industry. ETFs offer much lower fees, higher liquidity and tax advantages over mutual funds.
"Investors have been selling expensive funds and buying lower-cost ones, exerting pressure on the industry, in general, and on active managers, in particular, to lower fees in order to stay competitive," Lamy said. "Fees for both active and passive funds have both been going down for the past 20 years. However, there is still a significant fee gap between active and passive for both equity and bond funds."
Bond funds did well for the month, again defying years of "Great Rotation" predictions that money would begin moving in massive quantities from fixed income to equities.
Bonds gained in both the passive and active categories. Taxable bonds pulled in $32.2 billion while municipal bonds gathered $4.3 brillion.