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Wednesday, January 25, 2017

Even the WSJ Prefers Index Funds

News summary by MFWire's editors

Net flows aren't the only problem plaguing active asset managers these days. They also have a pervasive image problem.

Tom Price
House of Representatives
Representative for Georgia's 6th Congressional District
It seems like every time you turn around another journalist is writing about how active funds underperform passive ones, or another FA-turned-guest columnist is opining about index funds' virtues, or new research is coming out that makes investing in active funds look like a bad bargain. And the problem stretches as far as the highest profile business newspaper in the land, the Wall Street Journal, not exactly a bastion of anti-Wall Street ideas.

"As a matter of financial literacy, most small investors should opt for index funds, eliminating the familiar day-trading peril of buying high and selling low, with low transaction costs to boot," the WSJ wrote in a recent editorial addressing controversy around the investments of Tom Price, President Donald Trump's nominee to lead the Health and Human Services Department.

The same day the paper wrote that, Morningstar released 2016 net mutual fund flows data. The research shop estimates that $504.776 billion net flowed into passive mutual funds last year, while $340.137 billion net flowed out long-term, active funds and $35.452 billion net flowed out of money market funds.

But there may be some reasons for active fundsters to hope. J.P. Morgan, Barron's reports, estimates that a majority of active fundamental and quantitative funds (58 percent and 52 percent, respectively) are beating benchmarks so far in 2017 (compared to 32 percent each last year). Meanwhile, the SEC just gave its blessing to a new kind of share class that may shift the way fees are paid around active funds in a way that may reduce the apparent cost discrepancy with passive funds by stripping distribution fees out of the active funds' expense ratios. (Most passive funds already don't include such built-in fees.)

Active fundsters have a lot of educating to do. 

Edited by: Neil Anderson, Managing Editor


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