July 2018 | Public Version

Billionaire investor Carl Icahn recently called passive investing a potential bubble that “[may] implode and could lead to a crisis bigger than 2009.” Icahn explained that investors are making a mistake using the market as a casino, with too much money flowing into index funds and investors not knowing what they own.

With interest rates held exceptionally low for a prolonged period, artificially expensive bonds made stocks appear relatively inexpensive. Additionally, the race to the bottom for fund fees caused some investors to overlook net return potential for the lowest fees. These circumstances resulted in massive inflows into equities as an asset class via passive index funds, with the rising tide lifting all stocks and passive investing becoming a self-reinforcing cycle. In the event of market turmoil, investors with heavy exposure to certain stocks may experience significant losses. We believe that investors should consider moving into actively managed funds in an attempt to mitigate the potential burst of what may be the passive investing bubble.

Source: Morningstar Direct. Inflows based on flow of U.S. money into passive and active funds between 2006 and 2017.

Past performance is no guarantee of future results. The referenced indices are shown for general market comparisons and are not meant to represent any fund. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges.