4 Reasons Why Investors Love Passive ETFs

While the ETF industry is growing by leaps and bounds, investors’ inclination toward passive ETFs is quite remarkable. There are about 1836 non-leveraged ETFs listed on U.S. indexes with an average market-cap of $3.29 trillion and average expense ratio of 0.57%, as per xtf.com.

Among them, 900 are passively managed, followed by 740 ETFs following the enhanced strategy and 196 active funds. It is being noted that though the investment objective of active funds looks more promising, the gush of money is flowing into passive investment vehicles, as per John “Mac” McQuown, co-founder of Dimensional Fund Advisors, (ab the $550bn investment group), as quoted on Financial Times.

Inside the Increasing Interest in Passive Funds

Low Expense Ratio

The outperformance was attributed to the strong performance and a low expense ratio. Expense ratios of active funds are higher than passive funds. Low expense ratio has been instrumental lately in amassing investors’ assets. Most ETF issuers have embarked upon the fee war.

BlackRock has been pretty proactive in slashing expense ratios for several products in a year. It is being said that the company took the step to give tough competition to other low-cost players like Vanguard and Schwab. As a result, the company has been witnessing strong inflows in recent quarters (read: Solid ETF Asset Inflows Boost BlackRock Earnings).

For example, BlackRock lowered fees for its S&P 500 tracking ETF, iShares Core S&P 500 (IVV – Free Report) , from 0.07% to 0.04%. The fee cut made IVV less expensive than another popular ETF, SPDR S&P 500 ETF (SPY – Free Report) , in its domain. The fund charges 9 bps in fees. However, yet another S&P 500-based ETF, Vanguard S&P 500 ETF (VOO – Free Report) , also charges 4 bps in fees.

The Financial Times article went on to explain that “BlackRock and Vanguard, the two biggest players in the passive investing world, manage nearly $11tn between them, having taken in nearly $600bn this year — the vast majority of it in ETFs and index-tracking mutual funds.”