The Fed and the ECB Are Making Passive Investing Trickier

Over the last 10 years, investors have been rewarded for keeping it simple. Passively invested assets have grown five-fold and been lucrative. Simply tracking the S&P 500 over this period meant almost tripling one’s money. Meanwhile, actively invested assets have suffered and shrunk. In the U.S., fewer than 20% of active managers beat their index-styled competitors in the last decade.

But the popularity of passive investing may soon be on the wane. The main reason is a change of central bank behavior that encourages investors to take a more active stance. The European Central Bank is under strategic review, and the Federal Reserve is changing its approach in making policy decisions based on actual data — which comes with a time lag — instead of on forecasts. As central bankers turn reactive, market participants have no choice but to take a more proactive seat.