U.S. mutual funds and exchange-traded funds collected $79 billion in 2023. This marks a rebound from a historically weak year in 2022, which represented the second-lowest positive organic growth rate in Morningstar data since 1993. It was negative until October. Investors poured $57 billion into U.S. funds in December, the largest monthly amount this year.
It's official: Passive funds will overtake active funds.
Passive funds have been steadily encroaching on active funds' turf for years, but they ended 2023 with more assets. While U.S. equity flows have long favored passive products, international equity and fixed income flows have followed suit, helping to get passive funds over the hump.
The index fund phenomenon is on cruise control
Active bond funds collected more dollars on a net basis than passive bond funds in the years leading up to 2013, but they haven't achieved that feat in a calendar year since. International equity flows began to favor passives in 2008, and US equity flows first turned in that direction in 2005, he said. For the past 10 years, it has been a one-way street.
Escape Category Flow to Passive Influence
Flows into the blended style category are strongest, as the largest and most prominent passive equity funds own a broad swath of the market. Conversely, value and growth categories tend to lean towards actively managed strategies and are more prone to outflows. The active-to-passive undercurrent sometimes complicates the investment signals of capital flows.
Push, pull and rebalance of market performance
A strong year for the stock market meant that equity funds' share of total U.S. fund assets expanded, but it wasn't that different from a year ago. Overall investor activity typically reflects rebalancing. That was especially true in 2023, when taxable bond funds saw more than $200 billion in inflows, while U.S. and sector stock funds saw outflows and international stock funds had very little inflows.
Active outflows offset passive inflows during US stock fund slump
Investors were net buyers of U.S. stock funds during the terrible market of 2022, but that reversed in 2023 when stocks recovered. U.S. stock funds are expected to experience outflows of approximately $14 billion in 2023. As usual, passive US equity funds saw large inflows ($244 billion), while active funds suffered widespread net outflows ($257 billion). Active funds shed assets in all nine U.S. equity categories in 2023. Large funds had their worst year on an organic growth basis since 2000.
Taxable bond funding storm returns in 2023
Rising interest rates sent bond investors fleeing in 2022, but rising yields and the prospect of future rate cuts brought in money in 2023. Taxable bond funds raised about $220 billion that year, a healthy amount but well short of the $400 billion. -Plus annual inflows from 2019 to 2021. Investors were spooked when interest rates peaked in the fall, but have otherwise been solid net buyers.
The Usual Suspects Dominates Fund Family Flows
IShares raised approximately $107 billion in 2023, leading all fund families. State Street and Vanguard weren't far behind. JPMorgan finished in fourth place and deserves a nod given its focus on active funds. But the era belongs to the giants of passive investing, and their market share continues to rise steadily. As of December 2023, nearly 30% of U.S. fund assets were held at Vanguard.
This article was adapted from the December 2023 Morningstar Direct U.S. Asset Flow Commentary. Download the full report here.