Vanguard has doubled its stake in the S&P 500 since 2010, prompting a warning for active managers in a new report out Bank of America Merrill Lynch.
The passives giant holds 6.8 per cent of the US index and has more than a 5 per cent stake in 491 of its constituents.
In 2010 Vanguard passed this threshold in 116 companies and held 3.3 per cent of the index.
The BAML report, The ETF-ization of the S&P 500, warns US managers Japan-focussed active funds have taken a hit as passives take over the market.
Passives now account for 70 per cent of AUM held in Japan equity funds, but active funds outperformance has fallen 12ppt compared to the prior decade’s average.
The BAML report also warns ETF fads have driven massive distortions in P/Es, recently seen in low volatility stocks – an area where ETFs have seen 150 per cent annualised growth since 2010.
It expects value, ESG and short-term quant strategies could become the next fads.
Since the financial crisis the proportion of the S&P 500 held in passive compared to active funds has almost doubled from 19 per cent in 2009 to 37 per cent today.
The report also warns the average price volatility of stocks with a high proportion of float held by passive tripled in the last 12 months.