Actively managed equity mutual funds suffered record net outflows of $208.3 billion last year, while equity index funds enjoyed net inflows of $28 billion, according to estimates from Morningstar Inc.
Exchange traded funds posted $158 billion in net inflows in 2008, the Chicago-based company said.
The last time equity mutual funds suffered net outflows was 2002, when $27.6 billion went out the door, according to the Washington-based Investment Company Institute. The only other year in the past two decades in which outflows exceeded inflows was 1988, when $14.9 billion left equity funds.
By contrast, active and index bond funds saw net inflows of $10.8 billion and $10 billion, respectively, according to Morningstar estimates.
The movement among equity investors to index funds and ETFs is a continuation of a long-term trend exacerbated by last year's market decline, said Cindy Zarker, director of the Boston-based industry re-search firm Cerulli Associates Inc.
Passive-fund assets grew to 17.8% of total mutual fund assets as of Nov. 30, from 11.4% in 2003, said research analyst Robyn Ivanoff, a research analyst at Boston-based Financial Research Corp., who noted: "It's difficult to find alpha-generating managers who can outperform over a period of time."
The recent market downturn probably has changed adviser behavior toward ETFs permanently, Ms. Zarker said.
"One of the hurdles of getting an adviser to adopt new products is inertia, and last year's extreme events broke through that inertia by getting advisers to say, 'I could have been using ETFs,'" she said.
When the market turns down, many investors choose to avoid the costs of active management in favor of an index fund, said Scott Burns, lead ETF analyst at Morningstar.
"Eventually, greed kicks in, and people start chasing managers. But right now, fear is trumping greed," Mr. Burns said.
"Many investors are questioning why they're paying for active management when the funds are down and fees are eating away at the return," Ms. Zarker said.
Some advisers share that opinion.
"If stock pickers didn't get it right in this market, when will they get it right?" asked Greg Plechner, principal at Modera Wealth Management of Old Tappan, N.J., which manages $370 million in assets. "According to conventional wisdom, in a down market, an active manager will protect you and stop the bleeding," he said.
Passive investors tend to buy and hold, said Jeff Keil, president of Keil Fiduciary Strategies LLC, an industry consulting firm based in Littleton, Colo.
"Index investors believe that over the long haul, the lower expenses will make a difference in their portfolio. They are sticking it out," Mr. Keil said.
"The actively managed investor is trying to get in and out, and capture market trends," he said. "It sounds like with actively managed funds, there was a lot of flipping going on."
But even advisers who see the flaws of active management aren't blind followers of indexing.
"The worst thing you could have done over the last 10 years was index," said Lou Stanasolovich, president and chief investment officer at Legend Financial Advisors Inc. of Pittsburgh, which manages $340 million in assets.
"You need actively managed funds to achieve diversity, but we'll adjust our portfolios as the market dictates," said Mr. Stanasolovich, who uses both passive and actively managed funds.
Money that moved to index funds or to cash will be go back to active funds once the market turns around, said Kathy Longo, a principal at Accredited Investors Inc. of Edina, Minn., which manages $600 million in assets.
"We are evaluating when and if we will go back into actively managed funds in the first quarter," said William Howell, president of Howell Financial Advisors Inc. of Indianapolis, which manages $15 million in assets.
"In this environment, investors should look for a fund to generate alpha by finding managers who have been able to keep their head above water," said Neil Elmouchi, president of Summit Financial Consultants Inc. in Westlake Village, Calif., an affiliate of LPL Financial of Boston that manages $125 million in assets.
"Investors need a fund with little bit more of a decision process in it," he said. "There are some fund managers out there who have done better than the worst."
If investors switch back to active funds, there is money on the sidelines to make the move felt: Assets in Treasury money market funds grew 150% last year.
E-mail Sue Asci at -email@example.com.