A new survey of investment advisers suggests that passive income investing is the best way to invest in socially conscious investments.
In a report released Monday by the Centre for Strategic & International Studies, the group says passive income investments are a better way to save money than active investments, like those that pay commissions or are offered for a fee.
“For the first time in years, there are a significant number of people actively investing in passive income-based investments that are profitable,” said Dan Stoffels, an associate professor at the Centre and the author of the report.
The report says passive investment funds have grown in popularity in recent years, with the average Canadian now saving about $500 each year.
“They are generally a better option for low- to moderate-income Canadians,” said Stoffens.
“There is a strong correlation between the number of passive investment options and the amount of money you are saving for retirement.”
For example, in the first quarter of 2018, active income investments in the Canadian market accounted for nearly half of all investment returns.
In the next year, the number jumped to almost 40 per cent, and in 2019, to nearly 55 per cent.
Active income investments pay a commission of up to 12 per cent of a fund’s investment income, but the returns are generally more than double that amount.
“If you are not actively investing, you can save as much as $600 a year in your retirement by investing directly in passive equity funds,” said Dr. Dan Stolles.
“That is a very low price tag.”
Active investments in Canadian markets are popular with investors because they are cheaper and more reliable than passive ones.
And because they offer a tax benefit, the amount that you pay on passive income is lower than on active ones.
“This is really a market in its infancy and we are seeing the effects of that,” said Stephen Schaffer, a senior economist at CIBC World Markets.
“People are seeing this as a good alternative to actively managed funds.”
In 2017, the Canadian Passive Income Index (CPI) index, which measures investment performance and the proportion of income coming from passive income, was up 6 per cent from a year earlier.
“It’s a really good indicator of where people are spending their money and the direction that they are going,” said Schaffer.
The CPI index is up for two reasons: a rise in the amount Canadians put into passive investments, and a rise among investors in other investment products.
The share of active income investing in Canada rose from 26 per cent to 29 per cent between 2016 and 2017, but by 2020, the share of passive investments was down 12 per year to 25 per cent and it has dropped for five years in a row.
The Canadian Passive Investment Index (CAPI) rose from 22 per cent in 2017 to 26 per in 2018, but is down 14 per cent for five consecutive years.
“We’re going to see a big increase in passive investments in 2019 and 2020, and then a big fall in 2020 and 2021,” said Paul Sillitoe, a professor of finance at Ryerson University.
“I think that’s going to be a big change in the next decade.”
The CAPI index is the first index of passive income to increase since 2011.
The index is now up for eight consecutive years and the share is up almost 25 per to 28 per cent each year since it began tracking in 2011.
The number of active investors rose to 9,988 in the year ended June 30, up 7 per cent year-over-year.
“When we look at the growth in passive investors, that’s an increase of 7 per to 10 per cent annually,” said Sillito.
“These investors are spending the money they’re putting into passive funds, and that’s a good sign.”
The share also grew for the first four months of 2018.
The share of investments in passive assets was up 10 per to 13 per cent over the same period.
“A lot of passive investors are really looking for the returns they can get from passive funds.
The return on their investments is going to come from the passive investments they’re using,” said David Bresnahan, managing director at RBC Capital Markets.
Sillitoes firm expects the Canadian passive index to grow more than 15 per cent a year until 2020, when it will be at a peak.
“You’ll see that increase in the CAPI for the next two years.
The CAPI is going up, the CAPIs will go up, and the shares of passive funds will continue to grow,” he said.
Saying passive investments are better than active ones, the report says people should consider investing in the Passive Income Fund (PIF) as an alternative to the traditional passive funds that are more expensive and less reliable.
“The PIF is a more diversified portfolio, and it’s not a passive investment,” said Bresner.