Chart of the month: a tipping point for index equity funds

For years we’ve been approaching the symbolic milestone of global equity assets held in index funds eclipsing those in non-index funds. That milestone is now shrinking in the rear-view mirror, as shown above.

Assets under management aren’t the only way that the index world has grown. In 2018, it was estimated¹ there were around 3.3 million stock indices worldwide – suggesting there were something like 75 times more indices than stocks. The rise of ESG-weighted indices and self-indexation means the number of indices has almost certainly risen since then, while the number of stocks remains about the same.

The composition of indices is also changing. Morningstar research shows the median number of holdings in index funds fell from around 500 in 1998 to around 150 by end-2022. In 1998, 85% of indices used market cap weights, which has fallen to 42% today.² Around half of the index funds they looked at had a tracking error of more than 4% compared with the ‘category index’ they represented, commensurate with the average non-index manager.

What does this mean for investors? Selecting an index has become an increasingly active decision.

1. Source: Index Industry Association’s Third Annual Survey Finds 2.96 Million Indexes Globally - Index Industry Association

2. Source: https://www.morningstar.com/etfs/some-index-funds-are-riskier-than-you-think