“Both large and small investors should stick with low-cost index funds,” wrote Warren Buffett in his annual letter to Berkshire Hathaway shareholders. It seems people are heeding his advice.
Passive investment funds — ones that track stock market indices — could own the whole U.S. stock market by 2030 if the current rate of growth continues. Today, about 30% of U.S. assets and 40% of U.S. stocks are held in such funds.
Passive funds like Vanguard, which are managed by rules-based algorithms, are on the rise because they have lower fees than active money managers and may be outperforming them as well. The algorithms also make possible rules around sustainable or responsible investing.
Platforms like OpenInvest and Motif are expanding socially- and environmentally-minded stock screening and thematic investing for people investing as little as a few thousand dollars. Journalist Marc Gunther has made a case for why foundations should switch to passive investing as well: it would free up capital for core program that is currently used to pay money managers.
How will the algorithms hold corporate management to account? Large asset managers like BlackRock and State Street have become outspoken champions of shareholder engagement as a catalyst for corporate governance improvement and long-term thinking.
Passive fund managers could become more active. Vanguard reportedly voted against ExxonMobil’s management in urging the oil giant to report its long-term risks from climate change and climate action.