n the past few years investors have increasingly turned to passive investment approaches. In the US equity sector 42% of funds are already managed passively. The advantages of ETFs are obvious: the management costs are far less than for actively managed funds and a higher degree of portfolio diversification can be achieved with relatively little effort.
But as the ETFs become increasingly successful the criticism levelled at passive products is becoming increasingly loud. In the longer term there is accordingly a danger that the increased use of passive rather than active asset management approaches could have major negative repercussions on the efficiency of the capital markets and on financial market stability. This criticism cannot be dismissed.
It is not possible to say at the moment how much the ETF market would have to grow to become a danger for the markets. The US ETF market is far more developed than the European market, but according to market forecasts the latter is likely to catch up, partly also fueled by new distribution channels (including robo advisors). In the case of European equity-based mutual funds the market share is around 25% today and should be able to continue to grow for a few years yet.
While many active funds fail to beat the index, all passive products lag behind the benchmark. Investors seeking outperformance must invest actively instead of “only” buying large-cap stocks. Should inefficiencies emerge in the market as the share of passive strategies increases, then the chances for active managers will increase. In addition, passive products can soon come up against their limits with respect to certain specific strategies. Specialists are therefore in less danger on the active side of ETFs as they cater to customer requirements. In addition, the trend should encourage active managers to move further away from the benchmark with their ideas, which increases the chances of achieving an outperformance. After all, active funds that move very close to the benchmark will simply lose more ground because of their cost disadvantages.