Episode 410: The State of Investing in 2026

0:04This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer, and Dan Bortolotti, Portfolio Manager at PWL Capital. Welcome to episode 410. Yeah. In this episode, we're joined by Shelly Antoniewicz, who I met in New York City when she was on a panel that I was moderating. Shelly is the Chief Economist at the Investment Company Institute or ICI. So ICI is a trade association representing the asset management industry and the individual investors that they serve. And as a group, they advocate for policies that strengthen capital markets and democratize access to them for the benefit of long-term individual investors saving for retirement and other financial goals.

0:50They do a ton of research, which Shelley leads that team on the structure and trends of the ETF mutual fund industries, on financial markets in the U.S. and around the world. And Shelley contributes to analysis on financial systemic risks and conducts economic analysis on the impacts of proposed laws and regulations governing funds. She's been with ICI since 2005, serving as senior economist, senior director of industry and financial analysis, and deputy chief economist. And prior to that, she spent 13 years as a staff economist and senior economist at the Federal Reserve Board. and Shelley's got a PhD in economics from the University of Wisconsin-Madison.

1:30I don't know if listeners will be familiar with this or not, but they should be, and we'll put a link to it in the description. ICI produces this massive document every year called the Investment Company Factbook. It is the most comprehensive overview of the global fund industry, drills down deepest on the US market, which is their focus, but it's got data for fund markets all around the world. So it looks at things like the split between active and passive, the split between ETFs and mutual funds, the changes in those things over time, lots of other really interesting stuff. So I've pulled data from that report for lots of my videos, and we mostly talked about things that are in that report with Shelley.

2:10Yeah. And I think the interesting thing about this book is that even though it contains enormous amounts of data, it also has a lot of commentary and it has a lot of narrative in it. And it looks at some of the reasons behind the trends and the data that's being observed. So it's not just the numbers. There's also a lot in there about insights into the industry. And we talk a lot about that during the course of our conversation. some pretty crazy data points on like how much of the global capital market is held in funds mind-blowing it's fascinating stuff and then yeah dan like you said explanations for why it's like here's the data look how much of this thing has changed over time but then it comes with lots of interesting commentary about here's why that happened really interesting conversation covering the global etf mutual fund markets and lots of interesting related points let's jump into it all right let's go to our conversation with shelly antonevich

3:12shelly antonevich welcome to the rational reminder podcast great thank you so much for having me i'm really really excited to be here today we're excited to be talking to you we're talking a lot about funds can you talk about what proportion of the global financial markets are held by regulated funds?

3:30Shelly Antoniewicz:So regulated funds, which you can think about as mutual funds, ETFs, closed-end funds, and that also includes USETs, which are really important overseas. They are operated very much like the U.S. mutual fund. So that's what I mean when I talk about the regulated fund space. So regulated funds are super important. They're a really important conduit for allocating capital globally. And so the C &O helps finance businesses and governments and households, even car loans, mortgage loans. And at the end of 2025, worldwide capital markets, so if you think of the value of equity and debt securities outstanding, that was$313 trillion.

4:18Shelly Antoniewicz:dollars. Regulated fund assets accounted for 28 % or$88 trillion. Holy smokes. People use these funds to invest their hard-earned savings and it goes through and it is allocated out to finance real world growth. Wow. Can you give us an idea of roughly how many funds there are in the U.S. market? I imagine it's an enormous number. It's pretty big. Yeah, there are almost 17 ,000 in what we call them investment companies offered by U.S. financial services companies at year-end 2025. And this number kind of moves up and down. You can think about investment companies as, again, just what I said, mutual funds, exchange-traded funds, closed-end funds, unit investment trusts.

5:12Shelly Antoniewicz:And some products become more popular, so their numbers grow. Others become less popular. Their numbers decline. So we've been roughly around$17 ,000 for a while. Okay, that's interesting. The number of mutual funds might decline, but the number of ETFs increases, that kind of thing? Yes. Interesting. $88 trillion roughly in global funds. What proportion of total fund assets are in equity funds? Well, we do have that for global, but I want to talk about for the U.S. because they're the biggest. And so U.S. registered funds, they're really concentrated in equity. So U.S. equity funds alone have$27 trillion or 61 % of all U.S.

6:06Shelly Antoniewicz:registered funds total assets. Wow. Wild. It's interesting. That's a sort of classic 60-40 stock bond breakup. Turns out industry-wide, it actually is similar. Isn't it? Yeah, it just does sort of end up that way. For the U.S., most of that's going to be in U.S. equity funds. Of that$27 trillion, you got$21 trillion in U.S. equity, primarily shares of U.S. corporations, and then world equity. So those that invest significantly in shares of non-U.S. corporations, they're accounting for about another$6 trillion. And how has the share of the overall market that's allocated to index funds changed over time?

6:51Shelly Antoniewicz:That's definitely increased. So the popularity of index funds has increased over time. Investors have been using them more and more. This growth we've seen through both the mutual fund side, so index mutual funds have grown in popularity as well as index ETFs. So at the end of 2025, 52 % of mutual funds and ETFs together, 52 % of mutual fund and ETF assets were in index ETF and index mutual funds. So a little over half. People hear that statistic and think that over half of the overall market is owned by index funds. What's the proportion of the overall U.S. stock market that's held by it? So that's a lot lower.

7:43Shelly Antoniewicz:People think when they hear like half of bond assets are indexed, they think it's the market, but it's not. Because, you know, you've got equity index funds and you also have bond index funds as well. So if you look at the U.S. equity market between index mutual funds and index ETFs, it's 19 % of the U.S. stock market is in index. 11 % is actively managed domestic equity mutual funds and ETFs. And then you got another 70 % out there that's all the other investors. These notions that index mutual funds or index ETFs are taking over the U.S. stock market really aren't borne up by the data. I mean, that share is increased, no denying that.

8:38Shelly Antoniewicz:If you go back to 2015, the share of index mutual fund in ETFs holdings in the U.S. stock market, that was 11%. Now it's up to 19%. So it is growing, but it is nowhere near the driving force behind the U.S. stock market. Some of the other investors could be in non-fund indexed strategies, but the numbers still. Absolutely. There's CIT's Collective Investment Trust. There's other strategies that could follow. If you have a separately managed account that you want to customize around the S &P 500, So you don't want some of the stocks that are in the S &P 500, but you want 400 of them. Yes, you can certainly do that.

9:25Shelly Antoniewicz:And there is that sort of indexing in there, but there isn't any way for us to track that. We can track what's in index mutual funds and index ETFs. So there's no question that the share of index fund ownership is increasing. And wondering what you feel the effect is of that trend on overall financial markets, both positive and negative. This was a topic of conversation that we had at a recent Vanguard event up in NYC and Ben moderated the panel. When I think about this question, I like to look at what has been done by academics that have researched this area. And so when I look across sort of the academic literature, I don't see one single unified conclusion about how index investing is affecting financial markets.

10:16Shelly Antoniewicz:The findings are in mixed, and in several cases, they point in different directions. So sort of the opposite conclusions. One example I have is a recent paper by Valentin Haddad and Paul Hubner and Eric, I think it's Loliti. I'm not sure I'm saying that right. And that was published in the AER last year. And that paper, it argues that the growing share of index investing has made demand for individual stocks less elastic. So that kind of just means that markets react less strongly to either mispricing or arbitrage opportunities. So that's what they found for individual stocks. But then they go on and they continue to do work.

11:05Shelly Antoniewicz:the same authors conclude that active investors still play a central role in price discovery and that the market has not become meaningfully less competitive as indexing has grown. So these are sort of two opposite conclusions within the same paper. They aren't contradictory to each other. It's just that, yes, you can have a little bit less elasticity, a little less quick reaction, but you still have the same result that we have had, which is very efficient U.S. capital markets. There's also this other literature out there. I like to look and I like to think to myself, what is the basic principle?

11:51Shelly Antoniewicz:The basic principle to me is that when you get news that comes in and you reassess what you think is going to be the returns you expect to get in the future, either for a single company or for a sector or something, and you get negative news that comes in, you change your expectation about what you think. Those returns are gonna go down. You can change, you can reassess, you can trade on that. Also the opposite direction. If I think that AI is gonna take over the world and we're gonna have huge productivity gains and we're going to need a lot of this infrastructure. I may want to invest in these companies really strongly.

12:39Shelly Antoniewicz:And that's how you get these sort of either superstar firms or these mega firms. It's all about the fundamentals driving the long run valuations and not coming from the fact that my 401k participant is putting some money in the S &P 500 index every two weeks. We talked earlier about the number of funds in the U.S. How many fund sponsors are there in the U.S. market? We do track this. And a lot of the information that I'm quoting is from our investment company, Factbook. We just published that a couple of weeks ago. And at year end 2025, we had almost 770 fund sponsors. Now, this has come down over the last 10 years.

13:30Shelly Antoniewicz:It's down about 100 fund sponsors. What proportion of those are actually taking in new money each year? And does that vary depending on whether they're mutual fund or ETF sponsors? It does vary. Yes. So we We track this also by long-term mutual funds and by ETFs. And ETFs have been a very popular product and they're growing. And they, last year in 2025, they got$1.5 trillion in net new cash flows. So a tremendous amount of money came into ETFs. And that's reflected in the percentage of fund sponsors that received new money. And that was 90%. 90 % of ETF fund sponsors received net new cash flow in 2025.

14:18Shelly Antoniewicz:And this sort of contrasts with the long-term mutual funds. Only 31 % of long-term mutual fund sponsors or fund complexes received net new money. That's super interesting. Good time to be in the ETF business, I guess. It's also interesting because many complexes are agnostic between the product. They offer both mutual funds. They offer both ETFs. They're selling more strategies and investment. They could care less about the wrapper. It's whatever people want. You want an ETF wrapper, you feel more comfortable with that. You feel more comfortable with the mutual fund wrapper. We have both. Yeah, interesting.

15:00So the consumers are really choosing the ETF wrapper more, it sounds like.

15:03Shelly Antoniewicz:Yeah, and we've seen the move from the mutual fund product to the ETF product outside the 401k space for about the last 15 years. And that is really coming through the financial advisory channel. How has the concentration among the largest fund sponsors evolved over time? The industry's become more concentrated so that the largest five complexes at year-end 2025 had 58 % of mutual fund in ETF assets. If you think about 10 years ago in 2015, that's up from 45%. We see a similar increase when you look at the top 25 complexes. Top 25 complexes, they had 86 % of the mutual fund in ETF industry at the end of 2025, and that was up from 75%.

15:59What are some of the reasons why assets are concentrating so much in those largest fund complexes?

16:05Shelly Antoniewicz:We talked about the number of fund sponsors, and I had noted that they've dropped by over 100 fund sponsors, have exited the fund industry in the last decade. While certainly economic factors have contributed to this, the heightened regulatory environment has also had an impact. Nature funds and ETFs have more rules and regulations to comply with than ever before. And honestly, compliance costs are tough for small and even mid-sized fund companies. So these costs become easier to bear the more assets that the firm has under management. And that's why we will see periodic waves of mergers across fund companies.

16:49Shelly Antoniewicz:I had mentioned like the largest five or the largest 25 complexes. If you look over the past decade, with some exceptions, those aren't the same set of firms. Some firms have merged or two middle market firms have merged to become a larger fund complex. And some of this is because when they do merge like that, they get these economies of scale and the compliance costs are easier. It's also harder for small fund companies to come in because of the compliance hurdle. How concerned do you think investors should be about rising fund complex concentration? Even though that the industry is becoming more concentrated, it is still intensely competitive.

17:39Shelly Antoniewicz:One way I like to look at how competitive the industry is, is by looking at our annual research report. ICI publishes a research report every year on fund fees. And on an asset-weighted basis, average expense ratios by mutual fund investors, they've fallen substantially. They've continued to fall. So if you think about in 2000, so 25 years ago, equity mutual fund investors paid on an asset weighted basis, 99 basis points for an equity mutual fund. Now on an asset weighted basis, it's 40 basis points. So 60 % decline. Hybrid mutual fund expense ratios have also declined by a lot over this period as well.

18:27Shelly Antoniewicz:And then ETF expense ratios have come down too. So everybody assumes that ETFs are always cheaper than mutual funds, and that's not the case. ETFs have also expanded into different asset classes. Even if you were to look at the same asset class, it is not a given that the ETF will always be cheaper than the mutual fund. You have to do your due diligence, certainly because scale matters. So economies of scale have big impacts on expense ratios. So a large mutual fund can have a lower expense ratio than a smaller ETF. So as we see funds flowing into mutual funds, can you talk a little bit about how market returns affect that?

19:20In other words, are investors just chasing performance when they decide where to allocate their mutual fund investments?

19:27Shelly Antoniewicz:When I like to look at investor sentiment, I like to add the mutual funds and the ETFs together because we have seen this move from mutual funds to the ETF product. So you've got to take that secular move into account. So when I'm thinking about investor sentiment, I like to add the two of them together. When you look at mutual funds and ETFs added together, it is interesting. We will see outflows from mutual funds and ETFs together when we see two years, a couple years of consecutive, very large increases in U.S. equity prices. That, to me, makes me think they're rebalancing. So they might let it run up, but eventually they rebalance.

20:16Shelly Antoniewicz:We have other data, and I believe it's two-thirds of mutual fund investors outside of their 401ks. So if they're investing in mutual funds outside their 401ks, they use a financial advisor. And ETF investors as well. And I think that one's lower because we have a lot of sort of do-it-yourselfer ETF investors, but I believe about half of ETF investors, retail ETF investors, use a financial advisor. So that's going to help with retail investors saying, look, I've let this run up. I need to rebalance out of that. It is interesting. I like to look at our weekly fund flows that we publish. I was looking at them intensely after the U.S.-Iran conflict started and the U.S.

21:06Shelly Antoniewicz:stock market took a bit of a nosedive. We saw a few weeks of outflows, very modest outflows. But then when it hit sort of that bottom and then started moving up, quite a bit of money. We saw a turnaround where between mutual funds and ETFs, we saw pretty substantial inflows into U.S. equity funds. Do you see any differences in the flows and the market flow response between ETFs and mutual funds? That one's really hard because of this secular move that we've seen between mutual funds and ETFs. So I can't really answer that. That's why I always add them together. On the bond side, what I will say is when you look at fixed income, we're not seeing as much of an outshift from the mutual fund to the ETF product.

22:01Shelly Antoniewicz:Both products, mutual funds and ETFs, are receiving inflows right now. Pretty substantial, pretty big inflows. I will say that the ETF product is receiving more inflows than the mutual fund product. Now, one of the big differences between mutual funds and ETFs, of course, is intraday liquidity. So you can trade an ETF throughout the day, whereas mutual fund orders are filled at the end of the day. How important is that intraday liquidity to ETF investors? So we do surveys of ETF owning households, and we ask them questions about why do you invest in ETFs. We give them a set of responses. So they can either say for retirement, cost effectiveness of ETFs, diversification of investments through ETFs, or the ability to sell ETF shares anytime during the day.

22:56Shelly Antoniewicz:And they can check any one of these boxes. They're not exclusive. So if all of those things are factors for why they invest, they can check all four of them. And 91 % of our ETF-owning households say that they appreciate their ability to sell their ETF shares anytime during the day. So it's an important feature for them. I'm surprised is that Hyde. Does that support John Bogle's concern that he always had about ETFs being vehicles for active trading? Well, just because investors say they appreciate the ability to trade intraday doesn't necessarily mean that they do it. They just like that option.

23:38Shelly Antoniewicz:Of course, I'm going to like anything that gives me an extra option. I went and looked at some other external data and I found NASDAQ's 2025 ETF retail investor survey. You guys probably have seen it already. And it does show that while retail participation in trading ETFs or trading in the markets has increased, my opinion of it is that it still remains pretty small overall. ETF retail investor trading is about 6 % of total ETF volume, according to their information. The one thing that they did find, though, is that younger cohorts like Gen Z are trading ETFs more frequently. About half of their Gen Z sample was trading weekly, and a quarter, one quarter, was trading daily.

24:28Shelly Antoniewicz:Is it a bad thing? They're younger. They're getting experience with the investment market. They're trying to put some money to work. Other parts of the NASDAQ survey shows that nearly 70 % of retail ETF holders, they're prioritizing risk, market conditions, and price trends when they're researching investments. So that long-form content engagement is up. And it suggests that they're moving towards really trying to understand how ETFs can work for them and help them to build their wealth. There's also another paper that was recently published in the Journal of Financial Stability. It's called Diversification or Distortion, the Role of ETFs in Retail Investor Portfolios and Performance.

25:22Shelly Antoniewicz:Because that's really what you care about if they're trading a lot, but are they doing well or not doing well? Most market timing, yeah, we tell people, please don't market time. Most often, it's not going to work for you. Take a long view. At some point, though, but then we tell them you got to rebalance. So there's got to be an in-between. So this paper by these authors, it looks at how ETF adoption affects retail investor performance. And it uses actually this really interesting panel of over 500 ,000 Finnish investors, probably because we don't have this data over here in the U.S., but they track them from 2007 to 2022.

26:04Shelly Antoniewicz:They find that the ETF adopters, at least in Finland, tend to be older, male, and more active, but they hold smaller but better diversified portfolios. They say first time, what their analysis is showing is that first-time use of ETFs yields statistically significant improvements in risk-adjusted returns. ETF users demonstrate greater portfolio resilience during financial crises. There's both ways. I think what's great about the U.S. capital markets is our freedom, our freedom to choose investments, our freedom to put our money where you yourself think you should put it based on your own risk tolerance and your own goals.

26:54So we've talked to guests about money flowing into index funds in higher numbers. The corollary of that, it's presumably that funds are flowing out of traditionally actively managed funds. And can you talk a little bit about just how significant that outflow has been over the last decade or so?

27:10Shelly Antoniewicz:It's been very significant. So if we look over the past 10 years, index U.S. equity mutual funds and ETFs have received almost$3 trillion in net new cash flows and reinvested dividends. That's quite a bit. On the flip side, actively managed U.S. equity mutual funds have experienced outflows of$3.4 trillion. Wow. It's almost like a mirror image. So it's not product specific. Do we know where those dollars have gone? Like, do we know they've flowed from active into passive? We don't know for sure because we don't track individuals. We can only see the patterns from just what the aggregate data is showing us.

28:02Shelly Antoniewicz:And then we look at other information that's out there. And one of the pieces of information that's out there is some data that's been published by Cerulean. They've been doing this for quite a long time. They've been publishing data on where fee-based advisors and full-service brokers are putting their household clients' assets. In what products are they putting their household client assets in? And we like to look at this in sort of 10-year windows. And the latest information that Cerulee has out when we published our fact book was for all of 2024. So if you think about fee-based advisors, back in 2014, they had 72 % of their household clients' assets invested in mutual funds.

28:56Shelly Antoniewicz:As of 2024, so 10 years later, only 46 % of their household clients' assets were invested in mutual funds. The flip side of that is there is now 49 % of those household client assets are invested in ETFs. And that's up from 17 % in 2024. The financial advisory communities moving from this traditional mutual fund or active mutual fund product over to the ETF product index, largely index-based ETFs. Although we have heard that advisors are also very interested in active ETFs, which have been growing in the last couple of years. That's really interesting. Do you know from, I don't know, surveys or anything like that, why that shift is happening?