In recent months, a significant discussion has emerged in the financial markets surrounding the performance comparison between actively managed funds and passive index funds, particularly in light of the rising popularity of Exchange-Traded Funds (ETFs). This debate is drawing attention to the question of why active management seems to struggle in outpacing passive strategies.
Recent data has shed light on this ongoing conversationAs of November 20, a majority of the highest yielding products since September 24 have been passive index funds, indicating their robust performanceHowever, a closer inspection reveals that numerous actively managed funds have quietly surpassed the returns of their relevant passive counterpartsFor example, the E fund’s two-year fixed open A shares have shown returns exceeding those of the Southern asset-based Northern Exchange 50 Index A, a theme indexSimilarly, several products under the umbrella of new technology themes have also outperformed traditional ETFs, like the Huaxia Shangzheng Science and Technology Board 50 ETF.
The Battle Between Active and Passive Management Heats Up
The year 2024 has showcased the impressive capital-raising abilities of ETFsPublicly available information indicated that by the end of the third quarter, total assets held by passive index funds—including passive stock funds, stock ETFs, and enhanced stock index funds—have reached an astounding 3.36 trillion RMBThis marks a significant milestone, as it surpasses the 2.77 trillion RMB held by actively managed equity funds for the first time.
Performance metrics have painted a vivid picture of the yields associated with passive products during the recent market recovery period, which have demonstrated significant upside flexibilityData from Tianxiang Fund Evaluation Assistant shows that between September 1 and November 17, the pure index funds significantly outperformed actively managed funds
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This trend illustrates a broader scenario where active management has, at times, lagged behind passive strategies particularly during steep market ralliesFor instance, among the public offerings, the highest performing product was the China Europe Northern Exchange 50 Index A, achieving a return of 146.19% since September 24.
Nonetheless, as the analysis unfolds, several standout active management products have managed to quietly exceed the returns of their passive index peers over the same periodShould we consider actively managed products like E fund’s two-year fixed open A and Huaxia Northern Exchange innovation small and medium-sized enterprises A, which also achieved returns around 110%, surpassing passive indicesAdditionally, products like the Nuoan Optimized Configuration Mixed A and specific technology theme funds have experienced surges over 75%, outpacing a number of passive offerings in the technology realm.
Deciding the Final Winner in Market Debates
Analysts from Tianxiang Fund Evaluate Center have pointed out that the dominance of passive funds typically occurs during phases of rapid market growth or when market styles are particularly polarizedFor instance, during a market surge from late September to early October, index funds quickly tracked those gainsHowever, actively managed funds may have been limited by their conservative positioning and more balanced allocations, rendering them incapable of realizing significant excess returns compared to broad market indicesIn scenarios where specific sectors experience dramatic elevation, active funds may again find themselves at a disadvantage due to insufficient concentration in those areas.
Furthermore, insights from Wang Yi, a researcher at Jinzhang Investment under the Geshang wealth management umbrella, suggest that prevailing market conditions are more dictated by sentiment and expectations rather than fundamental principles
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This suggests that identifying alpha—excess returns over the market average—has become increasingly challenging under the current conditions, favoring the more ubiquitous beta-driven passive index funds.
Industry experts have echoed similar sentiments that the formidable performance of passive funds can often be correlated with rapid market rallies or extreme market conditions, yet they caution against the sustainability of this trendWang Yuehui, a wealth advisor, argues that as the environment shifts from a broad market uptrend, active management allocations are likely to unveil greater potential for alpha generationAs such, investors may gradually favor products that promise significant excess returns, potentially reshaping the scope of passive investment.
From the perspective of Jin Zicai, the Deputy General Manager and Director of Equity Investment at Caitong Asset Management, ETFs serve as effective tools for capturing the growth across the entire marketHe believes, however, that an actively managed equity fund—when backed by a skilled fund manager adept at timing and selection—can potentially outperform the indexAccording to Jin, during the initial stages of an upward market, the fundamentals may only resonate with select players, positioning actively managed funds to capture more value than passive funds.
Navigating the Investment Choices
Choosing between active and passive management poses a significant challenge for investors, and multiple fund managers emphasize the importance of understanding the product's core positioningOne particularly insightful ETF manager highlighted the role of ETFs not as mere alternatives for investment, but as tools that simplify stock research and enhance investment efficiency, particularly in sectors where excess returns are less pronouncedAs a means of 'stock replacement', ETFs can resonate with certain investment models, yet they are not suitable for every investor and must be approached with a tailored strategy.
Industry observations reveal that as investor sophistication grows, ETFs may become a dominant player in the market due to their inherent advantages including lower costs and enhanced liquidity
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