Index fund assets have grown substantially in recent years, nearly tripling from $602 billion in 2008 to $1.7 trillion in 2013, according to research from the Investment Company Institute.
The uptick in the assets of index mutual funds is due to the popularity of low-cost ETFs, increased vigilance of costs in a low-return environment and a general frustration that active managers of core equity products havent been as successful lately, says Lipper analyst Jeff Tjornehoj. For advisors, this has coaxed them to include more index products into their practices.
While assets have increased radically, the number of providers have grown at a much slower pace. According to Tjornehoj, large providers will continue to gain market share at the expense of smaller providers and newer entrants. Because their low cost is often cited as a reason to own index funds, scale is necessary and as fund providers push costs down the profitability just isnt there for upstart competitors, says Lipper analyst Jeff Tjornehoj. For advisors, this means that there arent that many firms with index funds and if anything the number of firms that offer indexed mutual funds is likely to decline.
The financial crisis may have prompted slightly more growth in equity index funds, he adds, citing ICI data: the five years prior to the crisis saw average annual growth of 22% while the past five years post-crisis have seen their assets climb 25% annually.
Meanwhile, according to Tjornehoj, bond and hybrid index funds have grown more slowly than equity index funds and arent as large because the expenses of their active counterparts are often much less than active equity products. Therefore, the pressure to remove cost has been less.
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