The Unstoppable Rise of Passive

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

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

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.

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.

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.