Index Investing and Factor Strategies

There is a common perception that index investing will dominate the future of investment. In fact, despite index funds’ huge growth—achieving a 1,500-fold increase in assets under management (AUM) since 1989—active management still holds a larger share globally, representing 68% of all fund AUM by the end of 2024, according to the CFA Institute Research Foundation monograph Beyond Active and Passive Investing: The Customization of Finance.

Index funds initially focused on tracking market-capitalization-weighted benchmarks, but recent technological advancements and increased demands for customization have spurred the development of innovative index-based products such as smart-beta exchange-traded funds (ETFs), factor investing, and direct indexing. This evolution has also brought confusion around what constitutes index investing. CFA Institute Research and Policy Center addresses how index investing and factor strategies continue to shape the financial industry, providing rigorous research and analysis to help professionals and investment organizations understand the implications of these trends and position themselves for future success.

According to our report titled “Smart Beta, Direct Indexing, and Index-Based Investment Strategies: A Framework,” the growing importance of smart-beta ETFs and direct indexing blur the traditional lines between active and passive management. This situation calls for a new framework to better understand these evolving index-based strategies and emphasizes the need for enhanced transparency to aid investors and policymakers in making informed decisions.