Oaktree Capital co-founder Howard Marks didn’t mince words about the trillion-dollar rise of index funds, attributing the dominance of passive investing not to its inherent brilliance, but to the historic underperformance of active stock pickers.
The Fee Myth And Active Failures
In a recent interview with Nikhil Kamath, the billionaire distressed debt investor broke down the industry's massive shift toward passive vehicles like the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq 100, respectively.
While many industry observers point to the low expense ratios of index funds as the primary catalyst for their popularity, Marks argued that the root cause was much simpler: poor performance by Wall Street professionals.
“My answer is that indexation has taken over as it has, not because it’s so good, but because active management was so bad,” Marks stated.
He recalled his time in graduate school in the late 1960s, noting that professors were already teaching that most mutual funds underperformed benchmark indices while charging exorbitant fees. However, Marks stressed that fees are only a secondary issue.
“Even if they charged the same fee as the index fund, if the passive decisions are inferior—indexation is still better than active,” Marks explained. “It’s not the low fees. That exacerbated the problem.”
Psychology And The Active Opening
When asked if the ongoing market uptrend is the real reason indexation has triumphed, Marks conceded that market conditions play a role. He noted that “bad times create an opening for active management,” as panic artificially drives down stock prices, creating ripe opportunities for superior insight.
However, Marks warned that capitalizing on these downturns is “simple but not easy” due to human emotion. Quoting veteran trader Wally Deemer, Marks added, “When the time comes to buy, you won’t want to.”
Ultimately, Marks believes that while passive funds dominate today, there remains a vital role for exceptional investors who can leverage “superior insight” and independent thinking to outsmart the herd.
How Have Markets Performed In 2026?
The S&P 500 index has advanced 4.99% year-to-date. Similarly, the Nasdaq Composite index was up 7.89%, and the Dow Jones gained 1.16% YTD.
The SPY and QQQ closed lower on Monday. The SPY was down 0.37% at $718.01, while the QQQ declined 0.19% to $672.88.
Meanwhile, Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), fell 1.10% to close at $489.56 on Monday.
In premarket on Tuesday, SPY was up 0.36%, QQQ advanced 0.57%, and DIA gained 0.25%.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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