Passive U.S. equity mutual funds have become increasingly popular, outpacing their active counterparts in asset growth. The five largest passive funds saw defined contribution assets grow by about 57% over the past five years ended June 30 to $335.2 billion, while the five largest active funds fell by more than 8% to $156.4 billion. And most of the largest passive U.S. equity mutual funds outperformed active funds on an absolute and risk-adjusted basis.
Index outperformance: The five largest active funds’ performance largely failed to keep up with the Fidelity 500 index fund’s return, the largest mutual fund in DC plans. Over the past 10 years,** the Vanguard PRIMECAP Fund Admiral Shares was the exception with a 13.4% annualized return, handily outperforming the Fidelity 500 fund’s 12.2%.
Passive momentum: Among the largest U.S. equity mutual funds held by DC plans, 11 passive funds saw assets grow 50% over the past five years.* During that span, 30 active funds’ assets fell by about 2%.
Growth in DC mutual fund assets, by type
Risky business: The five active funds underperformed the largest passive fund on a risk-reward basis over the past five years.** Their higher volatility and lower returns resulted in lower Sharpe ratios. The active funds also produced negative alpha, a measure of excess performance vs. the benchmark.
Five-year Sharpe ratios
Flows favor passive: Annual flows to passive U.S. equity mutual funds have been higher since 2005. Last year, passive funds’ inflows were $46.6 billion, compared with $253.7 billion of outflows from active funds.
Mutual fund flows (billions)
*As of June 30. **Period ended Feb. 28. Sources: Pensions & Investments, Bloomberg LP, Morningstar Inc.