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Noah Smith

The Rise of the Most Powerful Idea in Investing

Sit back, enjoy decent returns and avoid overpaying a broker.
I'm minding my portfolio.

I'm minding my portfolio.

Photographer: Alberto Buzzola/LightRocket/getty images

The biggest story in the finance industry during the past decade might not be the 2008 crisis, or new regulation, or even record-low interest rates. Maybe it's the shift from active to passive-investment management. In the realm of mutual funds, the change is stunning. Here is a picture of fund flows in billions of dollars since 2007:

Source: Investment Company Fact Book

Why is this happening? One reason is technology, which makes it much easier to trade large numbers of different assets at the same time, and to construct baskets of assets that track indexes closely. Another factor might be low interest rates and declining returns, which make asset-management fees more salient and painful, pushing people toward low-fee passive-investment vehicles.