How Can I Benefit From The Indexing Flood?

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OSBON_017Indexing trickle turning into a flood – what’s that got to do with me?
For index investors – the so-called passive investors and their providers – the industry news this year continues to be an unbroken boulevard of green lights.  Money is gushing into index products, investor expenses are plummeting, investments are worth more than ever.  What’s going on, and why should investors care?

Does Vanguard want to take over the world?
For the active management crowd, this idea is no joke.  Vanguard, which along with State Street and BlackRock comprise the Big 3 of indexing, collected more than 90 percent of the inflows to ETFs in the first quarter of 2014, continuing the dominance it experienced in 2013.nteli_G

While Vanguard wins with its low expense passive approach, who’s losing? The big names in active management, including Fidelity and American Funds. Vanguard’s market share of long-term mutual fund and ETF assets has grown from 8 to 18 percent over the last 20 years while Fidelity and American, both once as high as 14 percent shares, now hold less than 10 percent of the pie.

It’s pretty clear that  20th century style mutual funds are losing to 21st century ETFs.  And for good reasons – lower expenses, better tax control, and better performance relative to asset class benchmarks.  This is becoming old news now as more research pours in each year indicating that active funds, on average, fail to keep up with index benchmarks. More individual investors are paying attention too, as the fund flows indicate.

Charlie Ellis calls  “game over”
Who’s Charlie Ellis?  Perhaps not a Twitterati with a high Q score, but in the investment world he’s one of our most sage and logical voices. He’s on the Yale investment committee and partner in the investment consulting firm, Greenwich Associates.  His recent article in Financial Analysts Journal, a true industry bible, paints an unhappy future for active managers. He sees no reason to believe active managers can turn the passive management tide and demonstrate justification for high fees as performance wallows.  His bottom line is that active managers should start looking for alternate career paths before it’s too late.

So what, what about me?
And that is indeed the question.  It’s one thing to witness a sea change in investment methodology; it’s another thing to comfortably ride the wave. How can and should you take part in the index revolution? How can you translate your current financial situation and future goals into a portfolio that makes sense for you and your family? Here’s a hint: just buying index ETFs at random is not the answer.

We suggest getting a professional analyst involved. We have one handy, Max Osbon. Together we can find the all-important overlap between what’s going on in the industry and what’s going on in your financial life. Now’s the ideal time to start that exploration and ride the wave.

John Osbon – josbon@osboncapital.com


This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Past performance is not indicative of future results.  Investment in securities, including mutual funds and ETFs, may result in loss of income and/or principal.

An investment cannot be made directly in an index.

Specific securities identified and described may or may not be held in portfolios managed by the Adviser and do not represent all of the securities purchased, sold, or recommended for advisory clients.  The reader should not assume that investments in the securities identified and discussed were or will be profitable.  

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