The growth of low-cost passive investing continues with vigour. The facts cannot be ignored. There are several catalysts driving the shift. The most obvious is the cost of investing. Passive is less expensive than active.
We suspect that artificial intelligence will now force the cost of active investing lower in the decades to come as the industry replaces people with computers. This is not a new theme, but it’s likely to accelerate. Torston Slok, chief Economist at Apollo, suggests there are three consequences of this development:
- Reduced market efficiency and price discovery
- Increased market concentration and volatility
- Growing correlation and systemic risk
Passive index buyers are paying extremely high multiples for many stocks today and are buying weak companies that will likely drop out of indexes too.
But the reality of active investing does not present a compelling argument. The vast majority of active managers DO NOT beat the passive index.
A big driver for many is clearly the cost of investing factor. In Canada, beginning in 2026, the industry will be reporting the cost of advice and the cost of investing on your client statements.
This may accelerate the push towards passive investing.
Another major driver of the active versus passive dynamic is the aging demographic and the funding of retirement portfolios. There are two factors here. As life expectancy has increased, the private pension industry has moved from a guaranteed outcome to a guaranteed benefit.
This shift has pushed investment managers towards target dated outcomes to match the future income needs better. This leads to more indexing. But as the population cohort continues to age, we will likely see a shift away from equity to more income-oriented (dividend/bond) outcomes.
One big growth area of exchange-traded funds (ETFs) are option linked strategies delivering more tax-efficient income outcomes. Of course, the fees are higher here than in the passive S&P 500 Index.
So what type of investing is right for you? The answer is different for everyone. Can you afford to take more risk to achieve your desired outcome?
Apollo is a private equity/credit manager and the trend to incorporate more private market solutions into retirement outcomes is coming.
There is a battle going on between passive low-cost product providers and private market providers as they enter the high-net-worth investor market. We think you need both in your portfolio, not one or the other.
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