Index funds are receiving increased attention, mostly centered on the virtues of low-cost and broadly diversified vehicles for accessing stock and bond markets. In a competition in which one side’s success is another side’s loss, it’s not surprising to hear active managers railing against passive investing. Some claim that increased usage of index funds is distorting market prices. The Carlson Capital Management team firmly believes that markets continue to work and investors can still rely on market prices.

Here’s why:

  • Assets invested through index funds still make up a relatively small percentage of overall assets in markets.
  • It’s the totality of the assets and participants in markets that matters. Security prices reflect the viewpoints of all investors, not just the population of mutual funds.
  • While the volume of assets held in index-based funds has increased, so has global market trading volume.
  • Active mutual fund managers continue to underperform, suggesting that the rise of indexing has not made it easier to outguess market prices.

As you can see, the data continue to support the conclusion that markets are working, and that while indexing has been a great financial innovation for many, it is only one solution in a large universe of different investment options.

Upper left: & ttps:// • Upper right: Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded. • Bottom left: Sources: Investment Company Institute, Lipper, and Morningstar. See ICI Research Perspective, Trends in the Expenses and Fees of Funds, 2018.ˮNote: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as investment choices in variable annuities. • Bottom Right: Equity mutual fund outperformance percentages are shown for the three-year periods ending December 31 of each year, 2004–2018. Each sample includes equity funds available at the beginning of the three-year period. Outperformers are funds with return observations for every month of the three-year period whose cumulative net return over the period exceeded that of their respective Morningstar category index as of the start of the period. U.S.-domiciled non-Dimensional mutual fund data is from Morningstar. Dimensional fund data provided by the fund accountant. Past performance is no guarantee of future results. For more methodology details, see the latest Mutual Fund Landscape brochure:

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.