Passive investing — where a fund simply tracks an index and no professional manager actively picks its holdings — has continued growing in popularity. In 2016, ETFs attracted $287 billion in new money while nearly $349 billion flowed out of traditional actively managed mutual funds, according to research firm Morningstar. Index funds (also passive, but different from ETFs) fared better, grabbing almost $221 billion in new investor cash last year.
The reasons for ETFs' booming popularity generally are due to their lower fees, transparency, liquidity and tax efficiency.
But, financial advisors caution, their performance is identical to that of the index tracked (with some exceptions), for better or worse. And while passive investing looks good when the whole market is going up as it has for eight years, a variety of economic factors and investor sentiment could bring the party to an end.
"If you look at about 2009 until  … you could have thrown a dart at the market and whatever you hit did well," said Sterling Neblett, CFP and founding partner of Centurion Wealth Management. "But I think we're hitting a stage where that's not going to work as well."
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From the trough of the Great Recession in March 2009 through early 2015, various research shows there was little dispersion among stocks — that is, they moved in lockstep on their upward march. The Standard & Poor's 500 Index, considered a broad measure of the market, boasted annualized returns of roughly 15 percent during that time.
And while the market has continued its climb despite a couple of bumps along the way, some reports out of Wall Street suggest that picking strong-performing stocks will become even more challenging.
Concerns about stock valuations, coupled with rising interest rates and uncertainty regarding how and when President Trump's policies could affect the economy, are contributing factors.
This means that active managers could get the chance to show critics why their funds typically come with an average expense ratio of 1.19 percent, compared with 0.56 percent for ETFs and 0.82 percent for index funds.
Given forecasts for market storms and the possibility for a correction, some financial advisors — who in the aggregate have been big consumers of ETFs for their client portfolios — already have moved some client money to active managers.