What share of the US equity market’s passively owned?

Non sequitur, I know. Every article’s supposed to be an election article until the civil war’s over.

No, but seriously, I do a flows update every week, and at some point a few updates ago, a reader asked about the persistence of outflows from mutual funds and the juxtaposition with never-ending inflows to ETFs. That contrast is, of course, a corollary of the secular active-to-passive shift.

In his latest, Goldman’s David Kostin tossed out a few statistics on that, which I thought might make for a refreshing break for readers already exhausted by wall-to-wall election coverage.

The figure on the left, below, shows the “substitution effect,” if you will. Over the past decade, US equity funds have actually seen a net outflow, with $3 trillion in redemptions from active funds slightly outstripping $2.8 trillion of inflows to passive products. It’s worth noting, as Kostin did, that the real “loser” here is active mutual funds. Active ETFs certainly aren’t as popular as passive ETFs, but they’ve nevertheless managed to gather a quarter trillion of inflows since 2014.

The figure on the right’s pretty remarkable: Passive ownership went from a post-GFC low of ~16% to ~25% today. Specifically, the dark blue line shows passive ownership of the median stock’s float, while the light blue line shows dollar-weighted passive ownership for the index.

One common criticism of the passive investing epoch says the top names invariably attract ever more assets as inflows to index-tracking products funnel cash to the market leadership in cap-weighted benchmarks, creating a kind of perpetual motion machine.

I buy that criticism, and most other criticisms of the passive revolution too for that matter, but as a lifelong proponent of passive investing I’ll confess to harboring a lot of cognitive dissonance on this issue. It’s possible to have too much of a good thing, and I’m open to the idea that there’s a threshold beyond which  “too much passive” risks market malfunction.

And yet, as Kostin remarked, evidence for various “passive singularity” doomsday narratives is lacking, or anyway too inconsistent to tell a coherent story.

As the figure on the left, above, shows, passive ownership among the Magnificent 7 is lower, at 22%, versus the so-called “S&P 493.”

The figure on the right shows the variation in valuations that can be plausibly attributed to passive ownership. Suffice to say it’s not especially important, or at least not on a simple statistical analysis.

“After controlling for fundamentals, passive ownership does not help explain any additional variation in multiples,” Kostin wrote. “[F]undamental metrics help explain 50% of the variation in multiples today,” he went on. Passive ownership, by contrast, isn’t statistically significant.