UK investors are set to increase their allocations to index funds by over 50% in the next two years as the ‘active vs passive’ debate becomes outmoded, BlackRock predicts.
The firm analysed over 600 “wealth portfolios” and found allocation to index funds, including exchange-traded funds (ETFs), were today 20% of assets nut would grow due to four factors that are “encouraging businesses and investors to re-think old habits”.
The firm says one driver is the increase in financial advisers who are outsourcing portfolio management at a time when there is more pressure of fee transparency, which favours low-cost indexing.
A second driver is a more detailed understanding of returns and a drive towards efficiency that is making investors “question their habits” and, in turn, promoting a wider recognition that index funds work well in active portfolios – such as by replacing ‘benchmark-huggers’. This means the active vs passive debate becomes more redundant.
The growth in robo-advice and digital wealth is another driver, as are UK platform, some which are working to establish the capabilities to efficiently trade ETFs. This will give a new level of choice and ‘wrappers’ for investors looking to build cost-efficient portfolios.
Joe Parkin, head of BlackRock’s ETF business iShares UK, says: “We’ve reached a pivotal moment in the UK investment story. There is growing recognition that many of the habits and processes that have got us to where we are today have become outdated and won’t meet the needs of clients in the future. The investment industry is beginning to stir and respond, and while change won’t happen overnight, the direction of travel is clear and irreversible.”
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