The Passive-Ownership Share Is Double What You Think It Is

Abstract

Each time a stock gets added to or dropped from an index, we ask: “How much money would have to be tracking that index to explain the huge spike in rebalancing volume we observe on reconstitution day?” While index funds held 16% of the US stock market in 2021, we put the true passive-ownership share at 33.5%. Our headline number is twice as large because it reflects index funds as well as two other kinds of passive investors, direct indexers and active managers who are closet indexing.

Keywords: Passive Ownership, Index-Linked Investing, Prearranged Trades, Index Funds, Direct Indexers, Reconstitution Day

JEL Classification: G11, G14, G23