Explanation

Correct Answer: A

Why A is correct:

1. Lower costs are the primary driver of passive investing growth. Index funds and ETFs typically have much lower expense ratios compared to actively managed funds.
2. Empirical evidence shows that most active managers fail to consistently outperform their benchmarks after fees, making low-cost passive strategies more attractive.
3. Cost efficiency is a key advantage of passive investing - investors keep more of their returns due to lower management fees, transaction costs, and turnover.

Why B is incorrect:

• Active managers often struggle to consistently outperform benchmarks, especially after accounting for fees. The growth of passive investing is driven by the recognition that most active managers don't deliver higher net returns.
• If active managers consistently delivered higher returns, there would be less incentive to switch to passive strategies.

Why C is incorrect:

• While correlations between asset classes can affect portfolio construction, this is not a primary catalyst for the growth of passive investing.
• The growth of passive investing is more fundamentally tied to cost considerations and the difficulty of active managers to consistently beat benchmarks.

Key Concept: The rise of passive investing is largely attributed to:

1. Lower costs (expense ratios, transaction costs)
2. Tax efficiency (lower turnover)
3. Academic evidence supporting efficient markets
4. Difficulty of consistent alpha generation by active managers

Passive investing has grown because it offers market returns at minimal cost, which often proves superior to active management after accounting for fees and the challenge of consistent outperformance.