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Exchange-traded funds: Passive aggressive

Retail investors are pulling out of ETFs – or are they?

The rise of passive investment management in recent years has been staggering. According to JPMorgan, passive funds now account for 35% of all equity, bond and hybrid funds in the US, 17% in Europe and 22% in emerging markets.

However, when US-listed exchange-traded funds posted net monthly outflows for a third month in a row in June – the first time that this has happened since 2008 – many started to hear alarm bells. If the sector posts net outflows for July, this would be the first time there had been four months of outflows since the late 1990s.

Could the market volatility earlier this year have slowed the relentless march to passive? It certainly represented the first serious road bump that many ETF buyers have experienced. Retail investor inflows into both bond and equity ETFs have subsequently slowed down a lot, but it seems a little early to call for a wholesale rethink of the strategy.

Despite the recent outflows, US ETFs still saw $124 billion of inflows in June, taking total US-listed ETF assets under management to more than $3.5 trillion – up by 50% since October 2016. That is a lot of money.

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