There is a major shift happening in the money management world… one that could have a major impact on your financial future.
This shift is automatically pushing investor money into a handful of overly bloated companies. We’re talking about megacap stocks that have no business getting this much investor attention.
Meanwhile, the stocks with the biggest growth potential are being ignored like the last kid picked in dodgeball.
We’re exposing this dangerous trend in today’s chart. And below, we’ll tell you exactly how you can protect your portfolio from the coming megacap bubble.
A Trillion-Dollar Migration
As you can see in the chart above, over the last decade, money has been flowing from actively managed funds into passively managed funds. Since 2006, more than $1 trillion has shifted from active to passive index funds.
And last year, it really intensified.
Investors yanked $264.5 billion out of active funds. They plowed most of that – $236.1 billion – back into passive index funds and ETFs. It was the greatest calendar year asset change in the last decade.
There is a reasonable explanation for this shift from active to passive. In fact, it’s a shift we’ve been encouraging at Investment U.
And it’s easy to understand why…
Costly Underperformance
Active funds – those with human managers behind the wheel – are notorious for their costly fees and underperformance.
Expense ratios – the fees investors pay for people to administer and manage their money – are substantially higher for actively managed funds. The average expense ratio for active funds was 0.82% in 2016. Meanwhile, passive funds charged an average of only 0.09%.
That’s an 811% overcharge in fees.
But you’d think that active Ivy League money managers are charging higher fees for a reason. They select the best stocks and outperform the market, right?
Unfortunately, that usually isn’t the case. After running the numbers, we found that 86% of active funds underperformed their benchmark over the last decade.
What’s more, last spring, the Obama administration introduced a fiduciary rule stating that financial advisors have to choose products that are in the best interests of their clients.
Since active funds are usually more expensive and less profitable than their passive counterparts are, advisors are often legally obligated to recommend passive funds. It’s easy to see how this contributed to the massive inflow into passive funds.
So we get it. In fact, we preach it.
Index funds should be the foundation of your portfolio. These funds move almost in lockstep with their underlying index, and they are considerably cheaper than their active counterparts.
But here’s the thing… They can’t be the only thing you invest in.
Just like you need diversity in asset classes, you also need diversity in investment selection.
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A Megacap Bubble Is Brewing
Many investors might not know this, but most indexes are cap weighted… and so are most of the passive funds that track them.
In a cap-weighted index, the greater a stock’s market cap, the more influence it has over the index’s movements.
Take the S&P 500 for example. It tracks the top 500 U.S. stocks based on market cap. It’s up 10.7% …read more
Source:: Investment You
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