Is the passive bubble ready to burst?

Everyone has heard about the bitcoin bubble; Neil Woodford has warned of a new tech bubble; and now investors are voicing concerns about a passives bubble. But if such a bubble exists, is it ready to burst? Or will index funds continue to steal market share away from their active peers?

Is the passive bubble ready to burst?

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Panicked sell-off?

Even if this year does prove more volatile, Seven Investment Management’s Peter Sleep does not agree that this will result in a panicked sell-off of ETF products.

“Most investors have both active and passive investments in their portfolio and I am sure they will come to reasoned conclusions about which they are going to sell,” the senior portfolio manager and firm’s resident passive expert points out.

“They might sell their active fund because it has underperformed, they might sell their passive fund because they want to crystallise a tax loss. They might sell their active fund because it is cheaper to trade – most retail online platforms do not charge for selling funds, but do charge for selling ETFs.

“Volatility was generally low in 2017 and could increase in 2018. That does not mean investors will lose money in 2018. You could have a very rocky year and still finish up in 2018, but you might not realise this until 31 December, once you have had a Santa Rally.”

Furthermore, passive equity investors know what they are signing up for, he says, “that equities are volatile and that they can go up and down”.

“If someone blew a trumpet at the start of every bear market or if someone invented a time machine then I am sure we could see an across the board sell-off, but until they do, I am not sure that we will see a sustained sell-off in passive.”

“2017 had $900bn (£666bn, €751bn) in ETF inflows, and I bet the flow into other trackers was similar,” says Sleep. “I am not sure if we will beat 2017, but I bet 2018 is another year of inflows into passive.”