We here at Tide Cycle love index funds…
What’s not to love… index funds offer low-cost exposure to a variety of market segments. They offer instant diversification – or an ability to focus assets by capitalization, style, industry, or category. They’ve proven nearly impossible for active investors to best on a consistent basis.
And so, it surprises no one that growth in indexed or passive assets whether domestic or international, equity or fixed income, has been dramatic. According to Morningstar’s fund flows data, passive funds overtook active funds by dollars invested in late 2023 – less than 50 years since index funds were invented.
Today half of every dollar invested in the markets is indexed.
With this growth we’ve seen concentration in ownership – large index fund providers Vanguard, Fidelity, BlackRock and State Street own 50% of U.S. equities.
Further we’ve experienced a concentration of the global stock market into the U.S. which represents fully half of the global stock market – up from 30% in 2011.
And further yet, we’ve witnessed concentration within indexes: the top 10 stocks in the S&P 500 Index currently comprise 40% of its value. In a recent blog post, NYU Stern School of Business professor Scott Galloway adds that since Chat GPT’s introduction in late 2022 75% of the S&P 500 Index’s return, 80% of its earnings growth, and 90% of its capital spending are related to AI.
Said another way, the recent strength of the stock market has virtually nothing to do with the broader economy. Is it possible that concentration is such that the U.S. can experience a recession without a stock market correction?