The shift by investors into exchange traded funds is poised to pick up pace next year, with flows into US stock ETFs forecast by Goldman Sachs to jump by a third to $400bn.
In a report released on Wednesday, the New York investment bank said it expects net flows into ETFs next year will reach a record high.
“The secular shift from active to passive management should persist next year, driving inflows into equity ETFs and outflows from mutual funds,” portfolio strategist Arjun Menon said.
Booming demand for ETFs, which provide investors with a way of capturing exposure to an ever-increasing variety of themes at a low cost, has come as many actively managed funds have struggled to outperform their benchmarks, Goldman said. Years of Federal Reserve stimulus, in the form of low rates and bond buying, has weighed on stock pickers’ ability to differentiate, boosting the allure of passive funds.
ETFs and mutual funds that track indices now control about 6 per cent of the total American stock market, which includes both public and private equities, up from 3 per cent in 2009, according to Goldman’s calculations. They have greater sway in the S&P 500 index, which includes America’s biggest public companies — controlling 14 per cent.
The rapid growth in ETFs, which are primarily held by retail investors, has been the cause of alarm among some market analysts. A particular concern is how ETFs will react when the period of low volatility and strong equities performance inevitably comes to end. ETFs are thought to have played a role in the severe market ructions of 2010 and 2015 – a point that has stuck in investors’ minds.