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Indexers Still Have Momentum, But for How Long?

Volatility returned to the domestic markets in 2016, which may be seen by active managers as an opportunity to outperform the indexers and regain some sales momentum. But the tides seem not to have turned in their favor just yet. Index giant Vanguard reported another record year of inflows attracting an impressive $236 billion in 2016. This windfall represented about half of an estimated $470 billion in net inflows into index funds and ETFs for the year. This contrasts with a net outflow from actively managed funds of roughly $200 billion. Even after the volatility of late summer, active funds continued to suffer substantial monthly outflows.

If the experience of the last week is any indication, higher levels of market volatility are likely to continue into 2016. It remains to be seen whether active managers can deliver on the promise of improved returns and better downside risk management in this environment. And, perhaps more importantly for active managers struggling with persistent and severe outflows, how long it will take investors to recognize and actually act on the value add?