Episode 410: The State of Investing in 2026

Episode Summary

Executive Summary: Shelly Antonovich of ICI explains how regulated funds have become a major global capital-allocation channel, the rise of ETFs and index funds, the persistence of active management, rising industry concentration, falling fees, and the growing role of advisors and retail investors. The discussion emphasizes that ETFs are increasingly a wrapper preference, not simply a passive-investing story, and that fund choice, disclosure, and investor education remain central.

Main Topics: Global scale of regulated funds (Priority: 5/5): Shelly explains that mutual funds, ETFs, closed-end funds, U.S. unit investment trusts, and similar regulated vehicles now hold a large share of global equities and debt, channeling household savings into real-economy financing. Growth of index investing and ETF adoption (Priority: 5/5): The conversation covers the rise of index mutual funds and ETFs, but clarifies that index ownership remains far below control of the overall U.S. stock market and that ETF growth is driven by more than passive investing. Market structure, competition, and concentration (Priority: 4/5): ICI data show fund sponsors and assets increasingly concentrated among the largest firms, yet fees continue to fall, suggesting the market remains highly competitive despite consolidation. Investor behavior, flows, and advisor shifts (Priority: 4/5): They discuss fund flow patterns, evidence of rebalancing behavior, and the ongoing migration from mutual funds to ETFs among financial advisors and retail investors. ETF liquidity, retail trading, and investor outcomes (Priority: 4/5): The episode examines intraday trading as an ETF feature, whether that encourages speculation, and research suggesting ETF adoption can improve diversification and risk-adjusted outcomes in some contexts. Private assets in regulated wrappers (Priority: 3/5): Shelly addresses interval funds, tender offer funds, and BDCs as regulated vehicles used for private credit and private equity exposure, arguing their liquidity restrictions are intentional investor protections. Democratization of investing through funds and 401(k)s (Priority: 5/5): The discussion highlights how regulated funds and employer retirement plans have broadened capital-market participation, especially among middle-income households, and served as a gateway to broader investing.

Key Arguments: Regulated funds are a major global financing conduit, not just a retail product; they help fund businesses, governments, households, and consumer credit. ETF and index-fund growth is real, but index funds still represent only a minority of the total U.S. stock market; broad market ownership remains dominated by other investor groups. The literature on whether indexing harms price discovery is mixed; some findings suggest lower demand elasticity, while others show active investors still drive price discovery. Industry concentration has increased, but falling expense ratios and strong competitive pressure indicate the fund market is still highly competitive. ETF adoption is driven partly by wrapper preference, advisor model portfolios, and product flexibility, not solely by a shift from active to passive management. Intraday tradability is highly valued by ETF owners, but this does not necessarily mean they trade excessively; many use ETFs thoughtfully and for diversification. Retail use of ETFs can improve portfolio diversification and resilience, and first-time adoption may improve risk-adjusted returns in some studies. Liquidity constraints in interval funds and similar products are deliberate design features meant to protect long-term investors, not necessarily signs of stress. 401(k)s have played a major role in bringing middle-income households into capital-market participation and in familiarizing them with fund ownership. Choice is beneficial, but investor education and disclosure are essential so people understand what they own and the risks involved.

Data Points: Global regulated fund assets: $88 trillion - Regulated fund assets at the end of 2025, representing 28% of global equity and debt securities outstanding. Global capital markets outstanding: $313 trillion - Total value of worldwide equity and debt securities outstanding at year-end 2025. U.S. investment companies: Almost 17,000 - Approximate number of U.S. mutual funds, ETFs, closed-end funds, and unit investment trusts at year-end 2025. U.S. registered fund assets in equity funds: $27 trillion - U.S. equity funds’ share of all U.S. registered fund assets. U.S. registered fund equity share: 61% - Share of total U.S. registered fund assets held in U.S. equity funds. U.S. equity within U.S. equity funds: $21 trillion - Portion invested in shares of U.S. corporations. World equity within U.S. registered funds: $6 trillion - Portion invested significantly in non-U.S. corporations. Index share of mutual fund and ETF assets: 52% - Share of combined mutual fund and ETF assets in index mutual funds and index ETFs at year-end 2025. Index share of U.S. stock market: 19% - Share of the U.S. equity market held by index mutual funds and index ETFs. Active domestic equity share of U.S. stock market: 11% - Share held by actively managed domestic equity mutual funds and ETFs. Other investors’ share of U.S. stock market: 70% - Remainder of U.S. equity market ownership outside index and active domestic equity funds. Index market share in 2015: 11% - Index mutual funds and ETFs’ share of the U.S. stock market ten years earlier. Fund sponsors: Almost 770 - Number of U.S. fund sponsors at year-end 2025. Change in fund sponsors over 10 years: Down about 100 - Decline in the number of fund sponsors over the prior decade. ETF net new cash flows in 2025: $1.5 trillion - Net new cash flows into ETFs in 2025. ETF sponsors receiving net new cash flow: 90% - Share of ETF fund sponsors with positive net inflows in 2025. Long-term mutual fund sponsors receiving net new cash flow: 31% - Share of long-term mutual fund sponsors with positive net inflows in 2025. Top 5 complexes’ asset share: 58% - Share of mutual fund and ETF assets held by the five largest complexes in 2025, up from 45% in 2015. Top 25 complexes’ asset share: 86% - Share of mutual fund and ETF assets held by the 25 largest complexes in 2025, up from 75% in 2015. Equity mutual fund expense ratio, 2000: 99 bps - Asset-weighted average expense ratio for equity mutual fund investors in 2000. Equity mutual fund expense ratio, 2025: 40 bps - Asset-weighted average expense ratio for equity mutual fund investors in 2025. Change in equity mutual fund fees: Down 60% - Long-term decline in asset-weighted equity mutual fund fees. Households owning funds: 56% / 76 million households - U.S. households owning mutual funds, ETFs, closed-end funds, or unit investment trusts in 2025. Middle-income household ownership: 46% to 59% - Share of middle-income households owning U.S. registered investment funds from 2005 to 2025. Second income quintile ownership: 24% to 43% - Ownership among the second-lowest income quintile from 2005 to 2025. Household mutual fund assets: $22 trillion - Stock and bond mutual fund assets held by households in 2025. Total stock and bond mutual fund assets: $23.6 trillion - Aggregate stock and bond mutual fund assets in 2025. ETF assets: About $12-13 trillion - ETF assets at year-end 2025. Fee-based advisor client assets in mutual funds: 72% in 2014; 46% in 2024 - Shift in fee-based advisors’ household client allocations away from mutual funds. Fee-based advisor client assets in ETFs: 17% in 2014; 49% in 2024 - Shift in fee-based advisors’ household client allocations toward ETFs. Active U.S. equity mutual fund outflows: $3.4 trillion - Net outflows from actively managed U.S. equity mutual funds over the past 10 years. Index U.S. equity mutual fund and ETF inflows: Almost $3 trillion - Net new cash flows and reinvested dividends into index U.S. equity mutual funds and ETFs over the past 10 years. ETFs as a reason for ownership: 91% - Share of ETF-owning households valuing ability to sell ETF shares anytime during the day. Retail ETF trading share: About 6% of total ETF volume - NASDAQ ETF retail investor survey estimate of retail participation in ETF trading. Gen Z weekly trading: About half - Share of Gen Z respondents in the NASDAQ survey trading ETFs weekly. Gen Z daily trading: One quarter - Share of Gen Z respondents in the NASDAQ survey trading ETFs daily. Retail ETF holders prioritizing research factors: Nearly 70% - Share of retail ETF holders prioritizing risk, market conditions, and price trends. Finnish ETF adoption study sample: Over 500,000 investors - Panel used in a Journal of Financial Stability study on ETF adoption and performance. Finnish study period: 2007 to 2022 - Time span of the ETF adoption and portfolio performance study. BDC, tender offer, and interval fund assets: $140 billion to $534 billion - Growth in these private-asset-oriented regulated fund vehicles from 2020 to 2025. Interval fund redemption limit: 5% per quarter - Typical quarterly withdrawal cap described as an intentional design feature.

Pivotal Quotes: "regulated funds are super important. They're a really important conduit for allocating capital globally" — Shelly Antonovich: Explaining why funds matter beyond investing, as a channel that finances real economic activity. "These notions that index mutual funds or index ETFs are taking over the US stock market really aren't borne up by the data." — Shelly Antonovich: Clarifying that fund ownership growth does not imply control of the entire equity market. "Choice is generally good." — Shelly Antonovich: Her broader philosophy on fund product variety, including active, passive, mutual fund, and ETF wrappers.

Implications: Funds remain central to household wealth-building and market financing, but investors should not equate ETF growth with total market takeover. Fees, wrapper choice, advisor model portfolios, and disclosure will shape the next phase of competition and product innovation.