Recent Insights from Dimensional -- Has Index Fund Growth Impaired Markets?
Above the Fray
Has Index Fund Growth Impaired Markets?
By Wes Crill, PhD Senior Investment Director and Vice President
Originally posted on November 11, 2024
One common concern about the increasing popularity of index funds is whether the corresponding decline in active management has impacted the function of markets. The premise is that a higher proportion of assets in index funds means fewer non-index investors devoting resources to analyzing securities, thereby increasing the chances of mispriced securities.
If the rise in indexing was producing low-hanging mispricing fruit, it sure isn’t showing up in the performance of actively managed mutual funds and ETFs in the US. Even as the percent of assets has expanded—jumping from 32% to 58% in just the past 10 years, according to ICI’s 2024 Factbook —the percentage of active equity funds outperforming their benchmarks over rolling three-year periods has not changed by much.?
It’s debatable whether index fund assets should be equated with passive behavior . And judging by the active fund landscape, it’s hard to argue markets are any less effective at incorporating information into prices.?
Appendix
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Data Sample The sample includes US-domiciled, USD-denominated open-end and exchange-traded funds (ETFs) in the Morningstar categories listed below. Index funds, load-waived funds, and funds of funds are excluded from the industry sample.? ?
Methodology? Equity mutual fund outperformance percentages are shown for the three-year periods ending December 31 of each year, 2004 through 2023. Outperformers are funds with return observations for every month of the three-year period whose cumulative net return over the period exceeded that of their respective primary prospectus benchmark. The beginning samples include funds as of the start of the three-year periods. Each fund is evaluated relative to its primary prospectus benchmark. Where the full series of primary prospectus benchmark returns is unavailable, funds are instead evaluated relative to their Morningstar category index. We aggregate funds with multiple share classes to the strategy level.? ?
Morningstar Categories? Fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, Global Large-Stock Blend, Global Large-Stock Growth, Global Large-Stock Value, and Global Small/Mid Stock. ?
Disclosures
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All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. Diversification neither assures a profit nor guarantees against loss in a declining market.?
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. ?
Investment products: ? Not FDIC Insured ? Not Bank Guaranteed ? May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.
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