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The Shift from Active to Passive Investing
Report

The Shift from Active to Passive Investing

Potential Risks to Financial Stability?

Kenechukwu Anadu, Mathias Kruttli, Patrick McCabe, Emilio Osambela and Chae Hee Shin
Federal Reserve Bank of Boston, 2018
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Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • For Experts

Recommendation

Passive asset management has profound implications for global financial stability, according to this scholarly study from Federal Reserve researchers Kenechukwu Anadu, Mathias Kruttli, Patrick McCabe, Emilio Osambela and Chae Hee Shin. They isolate the impacts passive funds could have on liquidity transformation, volatility and asset valuation, and find that these developments bear importantly on risk management. Retail and institutional investors, as well as risk professionals, investment managers and regulators, will find this a worthwhile read.

Take-Aways

  • Passive investing has grown faster than active management since the 1990s. 
  • Whereas active management seeks to outperform a benchmark, the passive approach tracks an index’s results.
  • By the end of 2017, passive mutual funds (MFs) and exchange-traded funds (ETFs) amounted to 45% of equity and 26% of bond assets under management. 

About the Authors

Kenechukwu Anadu is an analyst at the Federal Reserve Bank of Boston. Mathias Kruttli et al. are economists with the Board of Governors of the Federal Reserve System.

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