Active Funds Hemorrhage Cash While Passive Gains

In recent years, active players as a share of the stock market have shrunk rapidly, as investors withdraw funds from active firms and seek the lower-cost and higher-performing passive funds.

See this article from the Financial Times that shows money furiously exiting active funds since 2014. The outflows from active are large and they are accelerating.

This results in a very odd situation, since in order to raise cash for their departing clients, active funds must sell the very shares that they believe are undervalued. A momentum effect ensues, where shares that many active managers identify as cheap must be sold because their clients are gravitating away from actively managed funds to passively managed ones. So capital-starved companies see their stocks get cheaper, while larger firms with higher weightings in the indices, like the S&P 500 enjoy a steady stream of inflows into their shares.

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