Could investor appetite for passives be plateauing?

ETFs have done phenomenally for years, but the honeymoon period might be coming to an end

Could investor appetite for passives be plateauing?
The global ETF explosion has been fuelled in large part by investors who want low fees and decent returns. That sentiment is still present, but a new study suggests it might be weakening.

In a recently completed survey of US retail advisors, Credit Suisse found that 41% of new money in the last quarter was set aside for benchmark-tracking funds such as ETFs, reported Financial Advisor IQ. That number was flat compared to the previous quarter, observed New York-based analyst Craig Siegenthaler, who is overseeing such research for the firm.

He noted indications that demand for “passive management is hitting a plateau and moving closer to equilibrium with actively managed funds” in the US retail advisory channel. Respondents to the Credit Suisse survey reported an average asset mix of 48% active, 41% passive, and 10% alternative. If the pattern holds into the next quarter, Siegenthaler said it would more clearly show that rotation toward passive “will slow over the next 12 months.”

Jerry Slusiewicz, president of California-based Pacific Financial Planners, said that the shift reflected in the survey is likely linked to a short-term drift toward “performance chasing,” a topic he said has been getting brought up more in recent client conversations.

“[S]ince mid-year, domestic stocks haven’t been moving up or down very quickly,” he said. “The broader indexes have been stuck in a fairly tight trading range where even new records seem more like micro-highs than groundbreaking leaps of faith.”

Clients’ demand for bigger wins is increasing, and so is their interest in active managers who can prospect for richer sectors and defend against earnings slowdowns. That means advisors may need to become more tactical when it comes to portfolio management.

Still, people may not be ready to dive back into active management yet. From an informal survey of industry representatives, AEPG Wealth Strategies CEO Steven Kaye found a consensus of scepticism on the benefits of active fund management for investors, given historic lows in volatility.

Further complicating matters is the increasing prevalence of ETFs that mix active and passive strategies. According to Gary Quinzel, senior portfolio manager at AEPG Wealth Strategies, the use of “enhanced and alternative indexes is causing enough confusion … to blur the lines between active and passive management.”

With that blurring, he said, active fund managers’ claims of long-term benefits will become harder to believe. In other words, even if demand for passives isn’t at wildfire levels anymore, it’s not going to die down anytime soon.

For more of Wealth Professional's latest industry news, click here.

Related stories:
Are Canadian investors ready to hedge their bets?
How can investors dodge risks in tech investments?