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Index Funds Continue to Steam Ahead in the U.S.

The fortunes of active managers look as they did two years ago. And that is not good

The Index Trend Strengthens

Two years ago, I wrote a column that began: "Do active funds have a future? To cut to the chase: apparently not much."

When I said that, index funds were enjoying record-breaking sales and active funds were in net redemptions. But those numbers alone were insufficient evidence to conclude that active funds faced real trouble. Just as recent fund returns prove to be an unreliable guide for the next few years' returns, so too can sales trends reverse. That active funds were bleeding assets in 2014 didn't mean that they would still be doing so in 2016.

But when I studied the details, the case for active management looked worse than suggested at first glance, rather than better. The sales figures weren't hiding good performance by the active funds--for most categories, for most time periods, the index funds had the higher returns, usually with less risk. Also, the biggest sales successes for active management, international-stock and allocation funds, were vulnerable. As investor awareness grew, I argued, the "pendulum could soon swing" toward indexing in those areas, too.

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About Author

John Rekenthaler, CFA  John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

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