In the last few years, passive index investing has grown significantly, as those involved in the investment business try to capitalise on the growing demand for alternative ways of building investment portfolios that bypass both the high fees incurred in active fund management and the knowledge (and money) required to build a well-diversified portfolio.
At the end of 2016, the assets under management of exchange-trade funds (ETFs) amounted to $571bn and $2.54tn in Europe and the US respectively. According to data released by the consultancy firm ETFGI, 90 per cent of net fund flows in the US in the past three years have been into passive funds. Many believe the industry will grow to $5tn in the US by 2020, which would see the ETF sector surpass the hedge fund industry.
Modern investors are like modern consumers: they do their homework before shopping. Informed individuals now have access to all the data they need in a centralised place: the internet. They are no longer willing to pay for full service. For this reason, and also because most hedge funds are unable to consistently beat the market, the ETF industry proliferated and expanded its offer of index investing.
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