Active vs passive investing – the debate explained

The world’s largest asset manager, BlackRock, is paring back its active-equities group. BlackRock is responding to a surge of money into what’s known as passive investing.

It’s an approach endorsed by legendary investor Warren Buffett, who thinks the smartest thing your money can do is climb into a hammock and take the rest of the day off. The active versus passive debate is upending the investment industry.

A little more than a third of all US assets are in passive funds, up from about a fifth a decade ago. In the first half of 2017, flows out of active and into passive funds reached nearly $500 billion.

The trend toward passive has drawn in individual investors, institutions and even a lot of financial advisers.

At Vanguard, more new cash now comes in via advisers than directly from individuals or retirement plans. Passive investments are also threatening hedge funds.

Active investing is buying or selling individual stocks or bonds. It means putting money into mutual funds whose managers make those caseby-case decisions for you.

Passive investments track indexes: groups of securities alike in some way. Buying an index fund or an exchange-traded fund that owns every stock in the S&P 500, for instance, is a passive investment. – Bloomberg

A little more than a third of all US assets are in passive funds, up from about a fifth a decade ago. In the first half of 2017, flows out of active and into passive funds reached nearly $500 billion.