Skip to main content

Stock Market Chart on Blue Background

Ash Waechter/Getty Images/iStockphoto

Passive has gotten so large that it's killed everything in its path – including itself. Welcome to the "Passive Singularity."

There are now so many indexes that putting your money in an index-tracking fund is a move requiring an active decision, according to researchers at Sanford C Bernstein & Co. The industry's growth has even forced active managers to focus on selecting indexes themselves – be that to invest in, or to benchmark against.

"Ultimately, this brings us to a bigger point, which is that there is, really, no such thing as passive investing," wrote the quantitative research team headed by Inigo Fraser-Jenkins in a note this week. "This does not mean that people give up on buying cheap exposure to markets, but instead that the active-passive distinction breaks down."

Story continues below advertisement

It's the latest broadside from Bernstein's team, which in 2016 labeled passive investing "worse than Marxism." Investors so far aren't paying heed: passive mutual funds and ETFs absorbed $692-billion last year, compared to $45-billion in outflows for active funds, according to data compiled Bloomberg Intelligence.

The Bernstein strategists base their conclusions around the millions of indexes in existence, which far surpass the number of single securities. Do a little math and the madness is clear: with 3,000 easily-investable stocks, the number of possible combinations to turn into an index is a Googol (that number, written out, would be 1 followed by 100 zeros.)

Sorting through it all means that no passive manager can truly be passive – allocating to indexes will always require a discretionary decision at some level, the researchers argue.

To cope with this abundance of indexes, many ETF shops have turned to model portfolios and roboadvisers to aid clients with asset allocation, according to Andrew Craswell, vice president of investor services at Brown Brothers Harriman & Co. in London.

"We continue to see even traditional active managers using passive holdings in their portfolios either as some sort of tactical or long term asset allocation decision," Craswell said. "The active and passive divide is certainly blurring."

With nearly half of equity assets managed passively in the U.S., there's no sign that investors will stop gravitating toward cheaper, index-tracking products. Bernstein's new research wrestles with a world where passive is larger than ever, and active managers have to fight for the trust of their clients. The team concedes that "passive investing has been a great force for democratizing access to capital markets and reducing the costs to society of managing assets."But a massive bull market rally across equities and debt markets has left many investors blind to the risks, which smart asset allocation can help to mitigate, Bernstein said.

In January, investors added $25-billion to active ETFs and mutual funds while allocating $103-billion to passive vehicles, data from Bloomberg Intelligence show.

Story continues below advertisement

"By all means, investors should save money on implementation by using passive vehicles as part of their allocation," the strategists wrote. "But the myth of purely passive investment will be exposed by a low-return world."

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to
Comments are closed

We have closed comments on this story for legal reasons or for abuse. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies