The Unstoppable Rise of Passive
11 November 2024
More than fifteen years ago, I had an idea. I could see that the fund market was flawed. Hidden fees and banks’ biased product recommendations were misleading investors. I believed a relatively new and simpler type of product, the passive exchange-traded fund (ETF), could bring greater honesty to the market and make a difference.
Driven by my strong conviction, I founded the Netherlands' first ETF provider, Think ETF, in 2009 together with my colleague Gijs Koning. After 10 years of running a Benelux focussed business, we were acquired by VanEck, since when we have been marketing our ETFs to investors across Europe.
So, imagine my delight when, earlier this year, the data provider LSEG announced that the amount invested in global passive equity funds had surpassed that in traditional active funds. At the end of 2023, global passive equity funds accounted for more than $15 trillion in assets under management (AuM), while active funds managed were $14.3 trillion.1
Assets Under Management Development
Source: LSEG Lipper.
Transparent, Affordable, Putting Customers First
This is an important landmark and one that needs celebrating. Why? Because most ETFs are passive funds, which simply seek to track a financial market index. They’re transparent, affordable products that are easy to use and put customers first. It means my vision from more than 15 years ago has come into being.
These qualities give passive ETFs an advantage over active funds, the traditional type of investment fund. Managed by professional portfolio managers, active funds exist to generate returns that outperform their chosen benchmark index. However, hampered by the cost of investment research and trading fees, they mainly underperform the market.
Logically, this makes sense. Active funds not only trade in the market, they effectively are the market. Take away their transaction costs and, on average, they can’t possibly match its performance, let alone beat it.
Extensive research has shown active funds consistently failing to outperform. The chart below shows one such study.2
European Equity Fund Performance vs. Passive Benchmark
Passive benchmark: S&P Europe 350.
Source: Spiva, October 2024.
What’s more, over time, a fund’s management costs can have a significant impact on your investment returns. Consider the returns of two hypothetical funds—one active and one passive—assuming both generate an annual return of 6%. After deducting an active management fee of 1.5% compared to a passive fee of 0.5%, this seemingly small difference would result in the passive fund being worth over 35% more than the active one over 30 years.
For the record, I should point out that not all ETFs are passive. The majority are but a few fund houses have launched ETF versions of their traditional, active funds.
Worldwide3 Share of ETF AuM Invested
Source: VanEck based on Morningstar Direct.
The Next 15 Years?
What matters most to me is that ETFs have made investing accessible to a far wider audience. Apart from their low costs, they can be traded throughout the day and are transparent. Even with small investments, private investors can gain a broadly diversified exposure to markets and build their financial future.
Within the VanEck stable of ETFs, you’ll find a broad range of investment options. These include core building blocks such as an equal-weight sustainable world ETF, a dividend ETF, a real estate ETF, and bond ETFs—each tailored to different risk profiles. You can complement these with thematic ETFs that track trends you believe in, or integrate the building blocks directly through a multi-asset ETF.
A key element of transparency is also to clearly outline the risks associated with each ETF. Depending on the specific ETF chosen, potential risk factors include credit risk, interest rate risk, market risk, foreign currency risk, industry sector concentration risk, liquidity risk, real estate risk, and other risks specific to the ETF’s theme or investment strategy. These risks are described in detail in the prospectus and the Key Information Document (KID), both of which investors are encouraged to review thoroughly prior to making an investment.
Sometimes I wonder what the investment world will look like in 15 years. Will most people invest in their financial futures? Will well-diversified, honest products have made this possible?
I hope so. After all, my dreams for passive ETFs have come a long way in the past 15 years.
1 LSEG Lipper via Reuters: https://www.reuters.com/markets/us/global-markets-funds-passive-2024-02-01/
2 SPIVA: https://www.spglobal.com/spdji/en/research-insights/spiva/#europe
3 worldwide excludes domicile countries: China, Denmark, Egypt, Hungary, India, Israel, Liechtenstein, Norway, Spain, Saudi Arabia, Taiwan, Turkey and United Kingdom.
IMPORTANT INFORMATION
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions. This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Sustainable World Equal Weight UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Global Real Estate UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Multi-Asset Conservative Allocation UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks a combination of bond and equity indexes. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Multi-Asset Balanced Allocation UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks a combination of bond and equity indexes. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Multi-Asset Growth Allocation UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks a combination of bond and equity indexes. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
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All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
