Passive fund holding of US stocks surpasses active fund ownership

The trend contrasts sharply with a decade ago when active funds had higher ownership of Wall Street stocks

Passive fund holding of US stocks surpasses active fund ownership

Passively managed index funds are holding more of the US stock market than actively managed funds for the first time.

According to the Investment Company Institute, an industry trade group, passive funds accounted for 16% of US stock market capitalization at the end of 2021, exceeding active funds' 14%.

The trend indicates a significant shift from ten years ago, when active funds controlled 20% of Wall Street stocks and passive funds only 8%.

More than US$2 trillion has been transferred from actively managed domestic equities funds to passive ones, principally ETFs, in the United States since that time.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, told the Financial Times: “It’s the latest milestone to fall [to index funds]. It’s been a slow build for decades now.

“It does raise questions of what the endgame is. Passive is only efficient as the active players in the market make it. We probably have some way to go before passive becomes less efficient, but it does raise questions as to where the equilibrium should be,” Lamont added.

Index-tracking funds' seemingly inevitable development has resulted in unprecedented concentrations of ownership — and hence voting power.

According to the ICI, the top five mutual fund and exchange traded fund sponsors accounted for 54% of the industry's total assets last year, up from 35% in 2005.

The top ten control 66% of assets (up from 46% in 2005) and the top 25 control as much as 83% (up from 67%). Over time, the number of assets controlled by the many hundreds of managers outside the largest 25 has been cut in half.

The top ten fund houses manage the majority of passive assets, according to the ICI's 2022 Factbook, which attributes this increase in industry concentration to these funds' spectacular rise.

Since 2005, actively managed domestic equities mutual funds have seen net outflows every year, whereas their passive counterparts have seen inflows every year except 2020 and 2021. ETFs that track indices have become even more popular.

Since 2012, the assets of US-listed ETFs, the vast majority of which are passive, have increased fivefold to US$7.2 billion.

New equity ETF issuance reached US$731 billion, three to four times the level observed in previous years. According to the ICI, 88% of ETF ranges experienced positive net inflows last year, compared to just 48% of mutual fund ranges, continuing a decade-long trend.

In 2021, there were 398 new ETFs accessible to US investors, up from 197 in 2015, with just 59 liquidated or combined.

Demographic data suggests that ETFs will continue to eat into mutual fund market share.

According to ICI data, ETF investors are younger — the average age of the household head is 45, compared to 51 for mutual fund owners — and wealthier, with an average household income of US$125,000 and financial assets of US$375,000, compared to US$104,900 and US$320,000 for mutual fund owners, respectively.