Mr. Powers said the advantages of index investing — low costs and broad market exposure — have attracted assets into ETFs and he expects this trend to continue.
"The acceptance and preference for indexing, that's at the core of why ETFs have become so popular. We know it's challenging for active managers to outperform. More investors are saying 'I don't want to bear that risk' or 'I want to bear less of that risk so I'm going to invest in an index product,' and an ETF is increasingly the preferred way to do that," Mr. Powers said.
Vanguard is the largest U.S. defined contribution index manager in P&I's universe, with $1.07 trillion in indexed DC assets as of June 30, a 3.3% increase over the previous year. Mutual funds, which account for more than 65% of Vanguard's total indexed assets, rose 2.4% to $2.99 trillion in the year ended June 30. Vanguard has been the largest manager of mutual fund indexed assets since P&I's survey began in 2006.
Mr. Powers said many of Vanguard's index mutual funds and ETFs are share classes of the same fund. "Seventy of our products are structured to have both an ETF and conventional mutual fund share class on the same fund. That has benefits for our ability to track a benchmark well, our ability to create scale in the products, and therefore be able to lower costs. So we are agnostic as to which structure is better for a client. It really depends upon the client's situation," he said.
Some clients, such as defined contribution plans, may be better served by mutual funds that allow systematic deductions and partial share purchases. "With ETFs, the ability to buy partial shares is a relatively new phenomenon, and not really available on many platforms. So we operate in this space where we offer investors options, depending upon their situation, to access indexing in the vehicle that best suits their needs," Mr. Powers said.
By asset class, U.S. equities retained the largest share of worldwide indexed assets, growing 3.6% to $7.22 trillion as of June 30. Global equities increased 8.4% to $1.58 trillion during the one-year period and international equities fell -0.4% to $2.75 trillion.
U.S. equity assets passively managed for U.S. institutional tax-exempt investors rose slightly to $3.06 trillion from $3.04 trillion in 2019. Indexed international equities rose 2.4% to $509.6 billion and global equities rose 10.3% to $355.6 billion.
John Delaney, portfolio manager, delegated investments, at Willis Towers Watson PLC in Philadelphia, said the S&P 500's continued strong performance through 2020 has kept U.S. large-cap index investing a good option for investors and made it a difficult space for active investors to add value.
"There's not a lot of call for, 'Oh, let's go actively manage against this narrowly led index that is tough to beat on an ongoing basis.' Where we've seen more interest in active management, in particular, is in the credit space, where, obviously, whether it's investment grade or high yield, there is an opportunity for managers to add value. The indices are constructed in a way that makes them susceptible to potential outperformance from managers. So we've seen interest there."
According to the midyear S&P Indices vs. Active Funds U.S. Scorecard, 63.2% of active large-cap funds underperformed the S&P 500, which returned 7.4% for the year ended June 30.
State Street Global Advisors, Boston, remained the third-largest manager of worldwide indexed assets, with an 11.6% increase to $2.49 trillion. A 21.2% rise to $842.1 billion in U.S. institutional tax-exempt AUM and 9.9% growth to $732.1 billion in ETF/ETN AUM kept SSGA in third place on those lists, as well.
SSGA's passively managed assets saw double-digit increases in several categories. Indexed AUM in U.S. defined contribution plans grew 41.6% to $312.3 billion in 2020; SSGA was the largest manager of indexed assets for U.S. endowments and foundations, rising 26.2% to $92.1 billion; and indexed assets managed for U.S. defined benefit plans grew 15.4% to $331.7 billion as of June 30.