ETFs Surpass Number of Stocks in the U.S. Market

A historic shift has occurred in the U.S. capital market: for the first time, the number of exchange-traded funds (ETFs) has surpassed the number of actively traded stocks. According to data from Morningstar and Financial Times, there are currently 4,370 ETFs available, while the number of listed stocks has fallen to 4,172.

This is a symbolic yet structurally significant milestone that confirms the transformation of the investment landscape. The ETF industry today manages approximately $12 trillion in assets, which is double what it was just five years ago.

ETFs were originally conceived as a simple, transparent, and cost-effective instrument that allows both retail and institutional investors to diversify at a lower cost than actively managed funds. Their popularity has further increased with the emergence of digital platforms and the growth of a generation of retail investors seeking quick access to markets and lower fees.

– “ETFs have become the entry point for a whole new generation of investors,” emphasize Morningstar.

The segment of actively managed ETFs is particularly growing, with their number in the U.S. doubling in the last five years, indicating that investors are increasingly seeking products that combine the flexibility of ETFs with the expertise of managers.

While ETFs are experiencing a boom, the number of publicly listed companies in the U.S. has been declining for decades. High IPO costs, regulatory requirements, and the trend of mergers and acquisitions have led to a reduced selection among individual stocks. Technology companies are increasingly remaining private longer than in the past, further decreasing the number of new listings.

ETFs thus become a sort of substitute: they offer investors thematic and sector strategies – from artificial intelligence and renewable energy to marijuana and cryptocurrencies, as well as funds driven by religious values.

However, the growth in the number of funds also brings new challenges. Analysts warn of the risk of fragmentation and excessive choice. “Too many options can confuse rather than empower investors,” commented Ben Johnson from Morningstar for FT.

Additionally, funds that do not attract sufficient interest are usually shut down after a few years, which can bring unexpected tax consequences for investors.

The situation where there are more ETFs than stocks does not mean that stocks are losing importance. However, it is clear that capital is increasingly being directed towards instruments that offer breadth, liquidity, and cost efficiency. ETFs have established themselves as a key building block of modern portfolios, not just in the U.S.

For investors, this means two things: easier access to markets than ever before, but also the need for caution when selecting a fund, as differences in costs, strategy, and management quality can be significant.

The milestone we are witnessing today is not only numerically interesting; it shows how Wall Street, and the broader global capital markets, are rapidly transforming from a world of individual stocks to a world where funds become the dominant mode of investment.

This situation was also commented on by the CEO of InterCapital Securities Danijel Delač, on his LinkedIn.

“Proponents of passive investing are surely satisfied, but it should be noted that in this inflation of the number of ETFs, there is everything. There are numerous subtypes that have nothing to do with passive investing but are constructed for short-term trading. Everyone has jumped on the ETF train,” writes Delač.

Delač adds that several ‘classic’ passive ETFs have been listed on the Zagreb and Ljubljana stock exchanges, and these ‘exotic’ ones should not even be expected.

– “There is a lack of liquidity, market depth, and everything needed for them to ‘function,'” concludes Delač.