A Reuters article today made the rounds this morning on ETF ownership of S&P 500 stocks that was an object lesson in social media gone wild. The first I time read the article was on CNBC’s website. The article is confusing, which is why it got so wildly overwrought on Twitter. Here’s the first paragraph:
“Higher single-stock volatility, valuation distortions and liquidity concerns could grow due to the surge in popularity of exchange-traded funds (ETFs), which now account for more than a third of U.S. ownership of the S&P 500, Bank of America/Merrill Lynch (BofA/ML) said.”
This is citing a Merrill Lynch study I haven’t got my hands on yet, but taken by itself, it’s, of course, absurd. The market capitalization of the S&P 500 is roughly $22 trillion as I write this. The entire ETF market in the U.S. is $3 trillion. That’s 14%. Even the whole industry—about $4 trillion, would only be 18%.
Doesn’t Add Up
And of course, that’s a ludicrous overstatement. By my count, there are 424 ETFs tracking U.S. equities. The assets across all of these funds are $1.47 trillion.
So even if all of those funds were just in S&P 500 stocks, it would be about 6.5%. Of course, there are loads of small-cap funds in that list, as well as a bunch of actively managed funds, and so on.
If you limit it just to the funds targeting either large-cap or total market, you end up with about 174 funds (depending on whether you include things like dividend ETFs and growth and value funds, which I did), or about $917 billion in assets under management. That’s about 4% for those of you playing the home game.
So, obviously, this is just wrong. However, the second paragraph of the article contradicts the first anyway:
“The proportion of stocks on the main U.S. benchmark equity index now managed passively has nearly doubled since the 2008 crisis to 37 percent while ETF trading accounts for about a quarter of the daily volume across U.S. exchanges, BofA/ML said.”
Not Just ETFs
OK, so now we’re not talking about ETFs, we’re talking about all passively managed assets in the world. This is impossible to figure to actually calculate (trust me, I’ve tried), but you can get close. In fact, BofA/Merrill Lynch just published a study in May on this topic, and its conclusion was that 26% of all managed funds were index-based; however, 38% of funds chasing U.S. equities were passively based:
So if 38% of the fund industry is passive, what’s the rest? Active. From the May report: “Today, there is $7T in U.S. active equity AUM (vs. $3T in 2000), ~4,500 active equity funds, and ~750 active equity managers, by far the most saturated market. Bottom line, there is too much capacity in the industry … ”
I suspect this is what’s really being regurgitated here.