The growth of passive investing seems to be unstopable. Currently, approximately USD 6 trillion assets are managed passively, on a global scale.1 US-based investors set the tone as passive investments represent already over 28% of total assets under management. Investors in US equities also seem to prefer passive as a total of almost USD 3 trillion is invested in passive vehicles that track the S&P 500 Index.2 Although most of these investors have apparantly given up on outperforming this well-known index, we present in this paper four conditions that stack the odds in your favor when applied in one integrated investment strategy.
The appeal of the S&P 500 is clear: this index offers investors exposure to liquid large-cap stocks from different sectors, that represent over 80% of the total market capitalization of US equities. Vehicles that track the S&P 500 are widely available at low-cost (sometimes as low as a few basis points). Moreover, investors don't need to engage in extensive and expensive manager due diligence. Given its transparency the passive portfolio doesn't hold any surprises with regards to sector or individual stock weights.
With such characteristics, it's not surprising that active managers face a very strong opponent when competing for assets. In fact, given the sometimes high fees that active managers charge, they start the competition at a disadvantage.