Individual investors have returned to the stock market in a very big way. But they are putting their money into plain vanilla, no frills, passive corners of the investing world.
In today’s column, my very first for Fortune, I’d like to officially welcome you back to the stock market. According to the Federal Reserve’s latest Z.1 release, it’s official—you’re in again. In fact, you’re just about as in as you’ve ever been.
In the last five years, the percentage of your household’s financial assets invested in the securities markets has increased by a whopping 25%. That’s a major behavioral change from what you had doing been since the last recession: shunning the markets, hoarding cash—even in retirement accounts—stockpiling treasury bonds and gold, deleveraging your personal balance sheet, and waiting for the next shoe to drop.
But that was then…
As of this writing, you (the collective “you,” that is) hold some $13.3 trillion in corporate equities, defined as stocks and bonds issued by corporations. Approximately $7.7 trillion of this total is in mutual funds.
This means that approximately 35% of all household financial assets are “at risk.” In fact, we’re now getting back to investment market participation levels not seen since the third quarter of 2007, during which 34% of all household assets were invested. The two previous peaks before then were Q1 2000 (43%) and 1968 (31%). Bears will note that these moments coincided nicely with the onset of the last three major bear markets, 1966 to 1982, 2000 to 2002, and 2007 to 2009.
If this seems ominous, it shouldn’t. The economy itself has become increasingly financialized over the years and American retirement has become much more dependent on investable assets. Viewed through this prism, stock market participation rates for households should be close to historical peaks.
To celebrate your undeniable comeback, let’s take a look at how you’re putting money to work these days.
The most significant change we can observe is your newfound preference for low-cost indexing. Five years ago, there was a debate between Fidelity Investments and Vanguard, largely played out in the press, over which firm held the most market share within the mutual fund industry. That debate would be laughable today, as Vanguard has since increased its assets under management from $1.2 trillion to over $3 trillion. To put that into context, Vanguard now manages more money than every single hedge fund on earth, combined.
In 2013, 98 cents of every net dollar that went into U.S. stock mutual funds went to Vanguard. While stock mutual funds finally went positive during a 30% broad market rally, this certainly didn’t translate into enthusiasm for stock picking or frequent trading. Active management, the skill that turned Fidelity and many other fund companies into household names in previous generations, no longer means much to you. Instead, the funds you’re putting your money into are largely plain vanilla, no frills, and devoid of excitement.
You have also fallen in love with exchange-traded funds. BlackRock tells us that U.S.-listed ETF assets have more than tripled since 2007, to $1.8 trillion and counting. Of this total, according to a PricewaterhouseCoopers study, approximately half is held by individual investors. BlackRock’s iShares unit alone manages over $1 trillion in ETF money, which is more than the ETF assets of Vanguard and State Street combined. Although the majority of ETFs are passive indexes, you’ve begun to very slowly embrace the idea of active versions of these products, provided the managers come from well-regarded fund shops like Pimco. In the last five years, asset growth in the active ETF space has run approximately 60% annually. That said, this is still a very small corner of the marketplace; active ETFs comprise less than 1% of the total industry assets.
Individual investors have also helped foster the idea of “smart beta”, which in previous eras we’ve referred to as factor investing—the isolation and selection of stocks with specific characteristics, like high dividends or superior earnings quality. While you haven’t shown much interest in stock picking, you’ve clearly demonstrated a desire to own stocks that have the ability to outperform the market. The difference is that you prefer to go about this pursuit systematically rather than follow the calls of gurus or Wall Street’s analysts. This shift is a fitting analog for what’s happening in the outside world, a growing belief in processes that are repeatable, an emphasis on science and mathematics over art and gut instinct. In the last few years, retail invetors pushed an astounding $382 billion toward smart beta index ETFs from such purveyors as WisdomTree, Invesco Powershares, and the AlphaDex series from First Trust.
These days, your fellow investors have adopted a distinct preference for working with fiduciary advisors as opposed to the broker-dealers and wirehouses of the past. The Registered Investment Advisor (RIA) channel has absolutely exploded in size since the prior peak in household investing back in 2007. Large Wall Street brokerages have seen their market share of the investment business shrink below 50% for the first time in, well, ever. Increasingly, clients and assets are finding a home with advisors who are bound to a higher standard of care. RIA firms are paid solely by individual clients like you, and, as such, they do not have the myriad of conflicts inherent in the old brokerage model. This trend dovetails nicely with the move toward passive investing and ETFs we’ve discussed above. RIAs manage approximately $364 billion of your money in ETFs, which is more than the combined $311 billion in ETFs held by the top four wirehouses combined.
The data is incontestable; you’re back in the market, even if you are reluctant about the decision.
You’re investing by rote these days, adding to index products while tuning out anything with even a whiff of the old stock market fever from the bull markets of the past. And you’re willing to entertain the possibility of market-beating returns, so long as the discussion is couched in the terminology of passive investing. Where possible, you’re opting for low-cost and low-conflict over pricey and high-minded.
There’s a lack of enthusiasm for investing in the modern era, but no lack of dollars coming into investment accounts. This reticence, I should add, comes despite one of the longest bull markets for stocks and corporate bonds in history—five years, seven months and counting.
There are no stock market heroes, no mutual fund kings, and zero new investing celebrities. The closest we come to anything like that would be Carl Icahn and Warren Buffett, who, at 78 and 84 years old respectively, are hardly what you’d call Tiger Beat material. Financial television ratings are at two-decade lows even as the percentage of your financial assets invested in the stock market are at 15-year highs.
The real bubble is not in the stock market, but in stock market apathy. If you are excited about investing again, you’re certainly going to great lengths to hide it.
But the important thing is that you’re in the game. Even if you’re not thrilled to be in it, it’s nice to see you investing for your future once again.