Traditional money managers are racing to sell their own exchange traded funds as investors continue to pour money into a business that has been dominated by a handful of giant fund companies.
"The industry is following the flows. Passive strategies and smart beta are gaining market share and no one wants to be left out of the ETF gold rush," said David Lafferty, chief market strategist at Natixis Global Asset Management.
On Monday, 70-year-old Franklin Templeton began trading its first passive ETFs — a group of 16 funds focused on a single country or region. The news followed the launch of the first ETFs with the USAA brand on October 26. USAA is a financial services company for members of the military and their families.
Passive investment products, including index mutual funds and index ETFs, account for nearly 47 percent of assets under management in U.S. stock funds, Goldman Sachs analyst Alexander Blostein said in a note on Monday.
Passive has nearly reached 50% of the retail equity market
Source: Morningstar, Goldman Sachs Global Investment Research
Passive investing is a style that minimizes trading by tracking an index, the opposite of actively managed funds that try to beat the index by buying and selling securities frequently to generate extra return. So-called smart beta is an extra twist, tracking an index by reweighting it or using other objectives.
As the passive approach has grown more popular among investors in the last few years, passive funds have been a major source of new money for the money management industry and are only expected to grow from here.
Global assets under management are expected to almost double to $145.4 trillion by 2025, and the share of money managed passively will grow to 25 percent of that total, from 17 percent last year, PricewaterhouseCoopers predicted in an Oct. 30 report.
Traditional asset managers "have to be involved, or they're going to get left behind," said Mike Venuto, chief investing officer and co-founder of Tosoro Investments, which this April launched an ETF to track ETF companies. The ETF Industry Exposure & Financial Services ETF (TETF) is up 16 percent over the last six months.