Assets in US passive investment funds are on course to overtake those in active funds by 2021, according to Moody’s Investor Services research.

The boom in cheap investment products has upended the fund management industry, draining assets from more expensive active strategies overseen by humans in favour of basic tools that buy stocks in popular indices — such as the S&P 500.

“Adoption of passive investment products in the US continues unabated,” Moody’s analysts wrote. “Lower-cost passive investment products more efficiently channel the earnings of corporate America to the end investor than do traditional mutual funds.”

In the US, assets in passive funds stood at $5.7tn at the end of 2018, compared to the $7tn parked in active funds, according to EPFR Global data.

In Europe, passive investing is growing, but commands a smaller share of the market. Moody’s predicts these low-cost products will represent a quarter of managed assets by 2025.

At the global level, the demand for cheap investment tools is unwavering. Last year alone, passive investment strategies attracted $472bn in new investor money around the world, while active funds lost $488bn, according to EPFR Global data. Casey Quirk, a unit of Deloitte that provides consultants to the fund management business, pegs the global size of the passive market at $17tn.

Cheaper investment tools strip out the fees paid to fund managers, brokers and research providers that erodes the returns delivered by active investments and the push toward passive investments will intensify competition between active managers, according to Moody’s.

“Over time, only the best players will survive, leading to a more difficult game. Similarly, active management could become more difficult over time, as a growing number of below-average active managers drop out or see their assets continually decrease,” the report stated.

Competition among large providers of passive investment tools has resulted in a high level of concentration in the market. BlackRock, Vanguard and State Street dominate the industry, but the torrent of assets flowing to these products has prompted rivals to join the fray, clipping the already razor thin fees to gain market share.

Last year, Fidelity launched a zero-fee index fund available in a mutual fund, while JPMAM this week undercut BlackRock and Vanguard to offer the cheapest-ever exchange traded fund that invests in US stocks.

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