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US$20 Trillion Now Under Blackrock & Vanguard

It’s likely that the two largest money managers will continue to get bigger.

I’m talking about BlackRock, Inc. [NYSE:BLK] and Vanguard. Both collectively manage close to US$10 trillion.

That’s already a colossal sum. But it could double…yes double, by 2025.

blackrock vanguard growth

Source: Bloomberg

As reported by Bloomberg:

Amassing that sum will likely upend the asset management industry, intensify their ownership of the largest U.S. companies and test the twin pillars of market efficiency and corporate governance.

‘…Investors from individuals to large institutions such as pension and hedge funds have flocked to this duo, won over in part by their low-cost funds and breadth of offerings. The proliferation of exchange-traded funds is also supercharging these firms and will likely continue to do so.

Easy. Low Cost. What’s to Lose?

I’ll bet a lot of BlackRock and Vanguard’s future clients will want their cash to be passive. Meaning investors want to buy index funds and exchange traded funds (ETFs).

And why not when the costs and returns are so attractive?

According to an S&P study, active fund fees cost investors billions over time.

Reported by The Australian:

Investors are throwing away billions of dollars a year on fund managers who fail to beat the ­returns of passively managed, far cheaper index funds, intensifying pressure on managers to justify their value.

Australia’s benchmark S&P/ASX 200 stock index rose almost 12 per cent last year but the 700 Australian funds trying to beat it returned only 9.2 per cent on ­average, with a quarter returning less than 5.9 per cent after fees.

The findings by S&P Dow Jones Indices are expected to rekindle the debate over what delivers better value for investors — actively managed funds or so-called index funds that track benchmark ­indices.

‘“We have consistently observed that the majority of Australian active funds in most categories fail to beat the comparable benchmark indices over long-term horizons,” said S&P in its annual “scorecard” of actively managed funds.

Investors Like Passive Strategies

Couple that with double-digit returns, it’s easy to see why investors like passive strategies.

Some ETFs have even achieved triple digit returns this year. One such ETF is the ProShares UltraPro QQQ ETF. It climbed up 115%.

proshares ultra share price

Source: Google Finance

QQQ aims to earn three times that of the NASDAQ 100 (100 largest US tech stocks). Below you can see QQQ’s holdings are household tech names.

QQQ's holdings

Source: ProShares

This all sounds great right? You can get higher returns with low cost ETFs. But how could you have known that 2017 was going to be a great year for tech stocks?

Which stocks will shine in 2018 or 2019? This quickly turns into a guessing game.

Chasing Returns

I have no idea how many investors piled into in QQQ in 2017. But I bet a lot more will by next year. That’s because the vast majority of investors chase returns. They’re more comfortable investing in funds with great performance.

But this is completely the wrong way to do it.

Buying in when returns are high and selling when return are low is like buying a stock at its high and selling it at its low. It’s a quick and easy way to lose a lot of money.

But as more people pile into passive strategies, it bids up those stocks in the index or ETF. Returns then climb higher, encouraging more investors to jump in, creating a cycle.

So why is this positive for individual investors?

Inefficiencies Everywhere

The market is not efficient — market prices don’t always reflect a business’s true value.  In my mind, this is truer if investors pile into passive strategies.

Many of these index funds and ETFs buy a weighted portfolio. Meaning they buy more of the bigger more expensive stocks and less of the smaller cheaper ones.

Thus, if any stock is bid up and become more expensive, the index fund or EFT will buy more of that stock just to maintain their weighing.

Think of all the opportunities at the smaller end of the market. They don’t receive nearly as much attention as their bigger cousins. And if more investors are happy to passively invest, there will be fewer eyes on the truly undervalued stocks.

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