What does it mean when the number of stock funds exceeds the number of stocks they hold? In their October 2019 paper entitled “What Happens with More Funds than Stocks?”, Ananth Madhavan, Aleksander Sobczyk and Andrew Ang tackle this question by examining holdings over time for all U.S. active equity mutual funds and equity exchange-traded funds (ETF). The look at commonalities and differences across all funds and between mutual funds and ETFs, including dominant equity factor exposures. Using quarterly holdings of all U.S.-listed U.S. equity mutual funds and ETFs during January 2007 through December 2018, they find that:
- The number of U.S. stock funds first exceeds the number of U.S.-listed stocks in 2007. At the end of 2018, there are 4,753 U.S. equity mutual funds and 1,510 U.S. equity ETFs, but only 4,397 U.S.-listed stocks.
- At the end of 2018, excluding leveraged/inverse funds, funds that blend equity with other asset classes and funds with less than 80% of holdings within the Russell 3000 universe:
- There are 1,666 U.S. active equity mutual funds holding 2,945 distinct stocks, with equal-weighted (asset-weighted) average expense ratio 0.98% (0.70%). The average fraction of assets in Russell 3000 stocks is 95.1%.
- There are 650 U.S. equity ETFs, with equal-weighted (value-weighted) average expense ratio 0.41% (0.14%). The 10 largest ETFs comprise 45% of total assets in these funds.
- Using holdings of this subset of U.S. active equity mutual funds and ETFs to categorize them:
- 10 categories encompass most funds, with fewer categories needed for ETFs than for mutual funds.
- A first approximation of stocks held by funds is large/growth, with an undercurrent of small/high-volatility.
- The largest (next largest) category for mutual funds relates to market (value-growth) factor exposure. Market factor exposure is also most important for ETFs, followed by value-growth factor and sector exposures.
- Because they are more diversified, the largest ETFs exhibit more commonality than the largest mutual funds .
- Commonality among mutual funds is roughly constant over time, but ETFs have become more diverse.
- Equity factor crowding is relatively constant over time, with growth having the largest increase.
In summary, evidence from analysis of U.S. equity mutual fund and equity ETF holdings over the last 12 years indicates that there are about 10 fund categories with a tendency toward large/growth stocks.
Cautions regarding findings include:
- The analysis addresses U.S. equity only.
- The study does not address investment implications, such as what categories of funds perform best.
See also the related “Factor Tilts of Broad Stock Indexes”.
