Indexing Grows Popular with the Pros

John Osbon - September 4, 2013

NYSETradingFloor-1When we describe our index boutique approach to investing, people often ask: “If indexing is so great why don’t more professionals do it?” The answer is:  “They do”.  A quick look at high profile, successful professional active managers shows a significant portion of assets going the index route.  See who’s doing it.

Elites do it

Many endowment funds – the tens of billions managed by the smartest university portfolio managers – are enthusiastic indexers.  Harvard indexes $450 million in 12 different iShares ETFs, including the S&P 500. Yale keeps $252 million in ETFs, and Stanford $83m.  With access to any investment on Earth, these managers hold the same kind of ETFs that our clients do.

Professionals do it

Boston’s own mega money manager Fidelity has a large and growing index management practice.  See Fidelity joins index club? Yes, Fidelity does index $48 billion.   So does the largest asset manager in the world, Blackrock.  Blackrock bought iShares, the oldest and largest index ETF provider, in 2009 to boost its assets under management to $3.8 trillion. Twenty percent of that, or $650 billion is iShares index funds. We’ve written often how Warren Buffett advocates indexes for individual investors and even took a million dollar bet that the S&P 500 would beat handpicked hedge funds. One guess who’s winning so farMassachusetts indexes, too, in a big way, and very successfully.

You’re probably doing it, too

Almost every portfolio transferred into Osbon Capital from another firm has some index ETFs in it.  I can’t always tell whether the manager bought the ETF or the client directed the purchase.  No matter, ETFs seem to show up everywhere.

Why?

With the professionally managed active investment community dominating the investment scene for so long, why is indexing becoming so common and growing so rapidly?  We can only assume that it is for the same reasons we discuss here week after week – indexing is low cost, tax-efficient, liquid, diversified, and outperforms active management regularly, with the longer the timeframe the more compelling the evidence.

Indexing is just getting started

The oldest ETF – SPY – was only established 20 years ago in 1993. Vanguard has become the largest investment management firm in the world through its groundbreaking index mutual funds, and its index ETFs in the past decade. Osbon Capital, the first ETF index boutique, was established in 2005 and is only 8 years old.

Indexing has come a long way, Still, in a $200 trillion global investment world with only a few trillion in index ETFs, we are just getting started.

The best is yet to come

As more and more professional utilize indexing for all the reasons described above, I believe we will continue to see more competition, better choices, and even lower costs. For investors, this is all good news.

 


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