This post shows that we continue to track to 4% inflation, twice the Federal Reserve’s target. The Fed announced this week that we would not see 2% inflation until 2025. That sounds right: recent monthly rates show no trend to 2% inflation. They show no trend to higher inflation. 4% looks rock solid now.

 

It’s important to track the recent trends in inflation since high inflation is a triple whammy for us retirees. 1) Inflation hurts the ability of companies to earn appropriate returns and grow; real earnings suffer. 2) Stock prices suffer more: the basis for a stock’s price is what the market assumes as the present value of stream of dividends (and stock repurchases). Higher interest rates that come along with higher inflation means the discount rate for that calculation is greater. The present value of the future stream is less. Prices fall. 3) High inflation consumes the spending power of our portfolios. All these factors lower our chances of increased annual Safe Spending Amounts (SSAs, Chapter 2, Nest Egg Care (NEC).

 

In my view, 4% is not that high of rate. All of us retirees have lived through almost two decades, in total, with inflation greater than 4%.

 

Steady and then declining inflation from a 4% rate has been good for investors. We hit 5% inflation in May 1989, and it took five years to steadly work down to the 2% rate that we enjoyed for more than 25 years. Annual stock returns for those five years were more than triple their long-run average of 7.1% real return per year. The damage comes earlier from increasing and very high inflation, not steady or declining inflation.

 

Going deeper in this post: I display a table and the same six graphs that I’ve use to follow the trends in inflation.

 

 

The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.

 

Seasonally-adjusted inflation increased by 0.12% in March. The rate over the last six months translates to an annual rate of 3.1%. Inflation over the past 12 months has been 4.1%. We would expect that historical rate to decline sharply in June: next month’s rate will replace very high inflation in June of 2022.

 

 

Core inflation excludes volatile energy and food components. The level and trend are more stubborn. Inflation was +0.44% for the month, and inflation for the last six months translates to an annual rate of 5.0%.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy was issued this morning. This measure of inflation is one that the Federal Reserve Board favors. The increase this month was 0.31%. The last six months equate to 4.6% annual rate.

 

 

 

== History of 12-month inflation ==

 

Full year inflation measured by the CPI-U shows that inflation for the last 12 months has been 4.05%. The historical 12-month rate has declined each of the past 11 months from its peak of 9.1% last June.

 

 

== Producer’s Price Index ==

 

The change in producer prices will impact consumer inflation. PPI over the last six months is at a -7.0%. annual rate.

 

 

== Services ==

 

Inflation for services is running fairly steadily at +6% annual rate.

 

 

 

 

Conclusion: The Core rate of inflation in May was 0.4%. The annual rate of inflation, based on the six recent months of lower inflation is about 4%. This is basically unchanged from last several months. Other indicators of inflation are mixed: the producers price index for goods is running well below 0% while the services price index is running in excess 6%. The good news is that inflation is stable and not increasing.

Patti and I have been back three weeks now, and we reflect on what a wonderful experience we had in Japan. It was very different from here. I describe some of the visual, physical differences that I will not forget.

 

Terrain. Mountains, mountains, mountains. Only 30% of the land is habitable. Japan was formed by tectonic plates slipping underneath another one: volcanos and uplift. The hills are about the steepest I’ve ever seen. It’s like someone took huge sharp shears to cut out the mountain sides. The tops are pointed. Some were so steep, I had a hard time thinking that trees could grow on them. The valleys are narrow. The rivers are pristine. We saw no plains for waving fields of wheat or other crops. Only very small man-made plots to grow rice.

 

Earthquakes. Japan averages 4 tremors or earthquakes per day. One woke us up the first night we were in Tokyo – pretty violently shaking our bed. That’s the first one we’ve ever experienced.

 

No really old houses. Volcanic rock – basalt – is so hard that it was not mined or cut into stones for buildings. All old buildings were made of wood. Most all old wooden buildings we saw are reconstructions of buildings that were destroyed by fire. Each has the traditional small open fire for cooking with no stone chimney. The exterior walls of historical homes were a sheet of paper – a thicker, tougher paper than what we have – and NO insulation from the cold.

 

 

Population density! 38 million live in Tokyo metro area. That’s about equal to PA, OH and IL combined (5^th, 6^th, and 7^th largest states). 19 million live in the Osaka metro area. It is very dense during rush hour. Very few women are on the streets or subways. Almost all men going to work wore black suits and white shirt; a man in a nice grey sport coat and light blue shirt stood out. Everyone is Japanese. This is a very homogenous population with strict requirements for immigrants: a big virtual wall. Foreign-born workers: 3% in Japan vs. about 18% of in the US. I would think economic growth would be limited by lack of workers. NO (or almost no) obesity: about 3% in Japan vs. about a third in the US.

 

Incredible infrastructure. The US spends 3.5% of its GDP on military expenditures. Japan spends 1.1%. Much of the difference is poured into infrastructure. The subways and trains are spotless and run perfectly on time. The bullet trains are especially nice.

 

You get a reserved car and seat on a train. The platform has a marking for your car number, and the train precisely hits the mark for you to get on your car. In the cities, you have a barrier with entrance gates that open when it’s time to board the subway or train – a safety precaution so no one falls on the tracks. Workers keep those barriers spotlessly clean.

 

 

We had to change from a regular train to a bullet train near Nagano that would take us to Osaka. The train we were to get on pulled in from the east, but it would have to go out the same tracks to then head south. While we were waiting to get on, the seats swiveled 180^o so that they would face forward in the new direction.

 

 

 

The roads are in perfect repair. Manhole covers are works of art.

 

 

There is NO Litter. There are NO splotches of chewing gum ground into the sidewalks. Our sidewalks in the two shopping areas within walking distance of us look filthy to me, and we likely have 1/20th the foot traffic of Tokyo. The coffee shop I go to is not clean by Japanese standards; I wonder if anyone else notices.

 

 

Many public toilets are architectural gems with very clean toilets. I don’t think I’ve even seen a public toilet in a city in the US. I think every toilet seat in Japan has a heated Toto washlet. We’ll buy at least one of those!

 

 

Conclusion: Patti and I look forward to our travel experiences. We had a wonderful experience in Japan last month. I describe some of the visual, physical differences that I’ll never forget.

In the long run, index funds will outperform: the chances are 15 of 16 that you’ll have as much or more in the future from an index fund than from an actively managed mutual fund. I am surprised that less than 20% of the value of US stocks are held by index funds. I’m surprised that so few investors hold what I judge as the KING of index funds: a US Total Stock Market Index Fund. This post points out reasons why this fund has to be the cornerstone of your holdings for US stocks whether you are younger – in the save and invest phase of life – or older, like me, in the spend and invest phase of life.

 

== Index funds outperform ==

 

Index funds outperform their peer actively managed funds in roughly 15 of 16 chances. The other way of saying this: if you bet on an actively managed fund in an attempt to outperform the market, you will be will be on the wrong side of that bet 15 of 16 chances.

 

Why? Before consideration of costs, actively managed funds are playing a zero-sum game relative to index funds. Index funds buy and hold and earn returns that almost exactly mirror the total market returns. Actively managed funds trade among themselves: each highly paid fund manager tries to pick the winners from the losers. Since they are only buying and selling with other active fund managers, their returns in aggregate, before consideration of their costs, have to match that of the total market or index funds. That’s simple math and the zero-sum game.

 

It’s less than a zero-some game for investors in actively managed funds when one adds in costs. An index fund will incur costs – expense ratio – generally less than 0.04%. This means index fund investors are keeping more than 99% of market returns. Actively managed funds incur costs of about 0.9% meaning that those investors, on average, keep 87% percent of market returns; they are giving up about 13% of the expected return year after year in the unrealistic chase to outperform the market. Compounding the difference in returns earned over time means investors in actively managed funds will have 15% to 20% less than index fund investors.

 

Some active funds do outperform. Their outperformance comes from the underperformance of other actively managed funds. Over 20 years, very few funds consistently outperform. Fewer than 1 in 16 active funds outperform their peer index fund in 20 years, as I described in this post.

 

== Only about 18% is held by index funds ==

 

The latest report from the Investment Company Institute (ICI) shows the steady increase in Index funds relative to Active funds. In 2000, Actively managed funds dominated; only 13% of the total invested in US mutual funds were Index funds. Now its 56%. Investors in funds that invest in US stocks get the basic story: they win with Index funds.

 

 

I am surprised, however, that Index funds are less than 20% of all the investments in US stocks. That means many investors – individuals, hedge funds, pension funds, insurance companies and the like – hold individual securities; they don’t invest in mutual funds. I’d argue that they are active investors, otherwise they’d own an index fund: they aren’t going self-manage to match an index at lower cost than the the lowest cost index funds.

 

 

== The KING of funds ==

 

Investors in Index funds favor funds that mirror the original index fund started by Vanguard in the mid 1970s, the one that tracks the performance of the S&P 500 stocks – the 500 US-based companies with the largest market capitalization value. These funds hold each stock in proportion of its market capitalization value to the total value of the 500. The S&P 500 stocks are about 85% of the market value of all stocks.

 

I argue the better fund, the KING of mutual funds, should be the one that holds roughly all of +4,000 stocks traded in the US. But fewer than 30% of index fund investors own this fund.

 

 

== Some US Total Stock Market Index funds ==

 

 

Patti and I own FSKAX as the sole holding for US stocks in our portfolios. It’s about 60% of our total portfolio.

 

== Four reasons ==

 

1. US Total Market fund is the ultimate in diversification. The addition of smaller company stocks tends to smooth the variation in the S&P 500 returns. Since 1926, S&P stocks have declined by more than 9% real return in 19 years. Stocks that were the balance of the market declined less in 11 of those years (58%). The decline for smaller company stocks averaged about 2.5 percentage points less. This is tempered by some years when small cap stocks declined more than large cap stocks: 2022 was the most recent example. They declined about the same in 2008 and less in the three-year period 2000-01-02 – the two other steep declines for stocks since 1973-74.

 

 

2. One might earn greater total return by holding the balance of stocks other than the S&P 500 stocks. Since 1926 these stocks have outperformed S&P 500 stocks by about 2 percentage points per year. They mightily outperformed S&P 500 stocka at the end of WWII and the last half of the 1970s. The returns over the last 40 years have been almost identical; they have lagged by about two percentage points per year over the past ten.

 

3. A Total Stock Market Index fund is actually combination of nine market-capitalization-weighted funds. I think it is impossible to construct a portfolio of actively managed funds that would outperform this index fund over time.

 

 

The market capitalization index for each of the nine boxes trounces the actively managed funds that concentrate on those boxes. The chances that an Actively managed fund will beat a peer, market-cap weighted index that is already a part of a Total Market index fund range from 1 in 7 (Large Cap Value) to 1 in 43 (Large Cap Growth).

 

I average all those boxes to make the general statement that only 1 in 16 (6%) of actively managed funds outperform their peer index funds. The converse is that an Index fund will return as much or more than an active fund in 15 of 16 chances. Since Large Cap funds are about 85% of the total market, it’s really closer to 18 of 19 chances that your stock investment in index funds will outperform.

 

4. Your investing cost to own a piece of all US stocks is low, low, low – the same if you owned an S&P 500 fund. You not giving up more of market return because of greater cost.

 

 

 

Conclusion. In Nest Egg Care, I recommend you hold a US Total Stock Market Index fund as the main building block of your portfolio. Patti and I own FSKAX which is about 60% of our total portfolio. About 18% of the value of US stocks are held by investors in index funds. About 30% of the investment in index funds is in a US Total Stock Market Index fund. Both of these percentages are somewhat shocking to me. They should be MUCH GREATER. This post restates the reasons why this fund is about the only security you should own for US stocks.

If you first bought an I-bond last year like I did, I suspect you are a bit confused on the redemption value of your I-bond, when to redeem it and how to redeem it. I was not clear when I wrote this post. This post explains how to find information to decide when to redeem and the steps to redeem. You’ll see my logic as to why I will sell my I Bond on August 1. I’m largely summarizing in writing this 25-minute YouTube video.

 

== I bond and interest earned ==

 

An I-bond earns a stated interest rate for six-month periods. Interest rates change every six months. I purchased my I-bond in the period of May – October 2022. I show interest rates applicable for my first three six-month periods. (This page has a more detail explanation of why I am earning an Inflation-component rate for all six month periods; my I bond has no fixed-rate component.)

 

 

Treasury posts interest from the first day of the month that you buy your bond. I purchased my I-bond on May 20. That means that for my first 12 months – May 1, 2022 though April 30, 2023 – I earned interest at about $80 per month for six months and at about $57 per month for the next six months. If you purchased in June, as an example, you earned the same interest for the year June 2022 through May 2023. This repeats for the purchase-months through October 2022.

 

== Current Redemption Value ==

 

You are eligible to redeem your I bond – have the Redemption Value deposited to your checking account – after one year. The first time I could have redeemed my I bond was this May.

 

TreasuryDirect.gov shows the current redemption value of your bond. The value displayed reflects a three-month interest penalty. You incur the penalty if you redeem your I-bond before five years.

 

Follow these steps to find your current redemption value:

 

 

The redemption value displayed for June for my I bond is $10,704. (Treasury also shows Redemption Value for your bond before your one-year anniversary, but you are not eligible to redeem then; that value has no meaning to you.)

 

 

== Trust Treasury’s calculation ==

 

The YouTube video explains that Treasury’s calculation of monthly interest earned is not is straightforward, but my calculation of interest earned is within $1 of Treasury’s calculation. Trust Treasury’s calculation. You don’t need to absorb the detail of how Treasury calculates interest earned as described in the video.

 

== Redemption Value in Future Months ==

 

You go through these steps to find redemption value in a future month.

 

 

I found my value for redemption periods starting in May 2023 – the first month I could have redeemed it – through September 2023.

 

 

August is the last month that I keep interest at the 6.89% annual rate. September is the first month that I would keep interest earned at the 3.38% rate. I judge I will earn more than that elsewhere. My current money market yield is 4.7%, for example. Since I don’t want to earn at the 3.38% rate, I should redeem my I bond in August. I get the same amount any day that I redeem in August. I therefore should redeem my I-bond on August 1 and put it to work aiming to earn more than 3.38% annual rate.

 

If you purchased your I bond in June, for example, this schedule shifts one month. If you find the 3.38% rate unattractive, you’d sell your I-bond on September 1. If you purchased your I-bond in July, you’d sell October 1. And so on.

 

== Steps to redeem your I bond ==

 

This is what I am going to do on August 1:

 

 

 

Conclusion. I was a first-time buyer of an I Bond in May 2022. This post describes how to find your current Redemption Value – the amount you will receive when you redeem your I Bond after one year. It describes how to find your Redemption Value in future months; if you judge a six-month rate as unattractive, you find the first month that you want to redeem. The post describes the steps to redeem your bond.

This post shows that we continue to track to 4% inflation, twice the Federal Reserve’s target. Why do I track inflation? I track the recent trends in inflation since high inflation hurts the ability of companies to earn appropriate returns and grow. High inflation consumes spending power of our portfolios, lowering our chances of increased annual Safe Spending Amounts (SSAs, Chapter 2, Nest Egg Care (NEC). Going deeper: I display a table and the same four graphs that I’ve used to follow the trends in inflation. I include two more that I added last month.

 

 

The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.

 

Seasonally-adjusted inflation increased by 0.41% in April. The rate over the last six months translates to an annual rate of 3.3%. Inflation over the past 12 months has been 5.0%. We would expect that historical rate to decline in the next two months, since May and June of 2022 averaged 1.1% inflation per month.

 

 

Core inflation excludes volatile energy and food components. The level and trend are more stubborn. Inflation was +0.37% for the month, and inflation for the last six months translates to an annual rate of 4.8%.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy was issued this morning. This measure of inflation is one that the Federal Reserve Board favors. The increase this month was greater than last month and greater than April 2022. The last six months equate to 4.2% annual rate.

 

 

== History of 12-month inflation ==

 

Full year inflation measured by the CPI-U shows that inflation for the last 12 months has been 4.9%. The historical 12-month rate has declined each month from its peak of 9.1% last June.

 

 

== Producer’s Price Index ==

 

I add this graph. The change in producer prices will impact consumer inflation. PPI over the last six months is well below 0%. It’s below 0% for the past 12 months.

 

 

== Services ==

 

I add this graph. Inflation for services is running fairly steadily at +6% annual rate.

 

 

 

Conclusion: The Core rate of inflation in February was 0.4%. The annual rate of inflation, based on the six recent months of lower inflation is more than 4%. This is about the same as last month. Other indicators of inflation are mixed: the producers price index for goods is running no greater than 0% while the services price index is running in excess 6%.

Hi. Patti and I have a big trip to Japan for the next three Fridays. It’s a mix of two tours. One “culinary”, that is in rural parts of Japan. The other is walking parts of two famous pilgrimage trails. We are looking forward to this trip, but I’m a little apprehensive about the 13 hour time zone change.

Treasury announced the six-month rate that applies to I-bonds – bonds with an interest rate that adjusts for current inflation. The rate of 4.3% APR applies to bond you buy between now and the end of October; the rate applies for six-months if you already own an I-bond. That rate does not excite me. It’s less than my current money market rate. You may want to follow my thinking on this: I see no reason buy a new I-bond. I therefore I have no reason to hold the I-bond that I bought last May 20. I’ll redeem mine on August 20.

 

The longer story:

 

== I-bonds ==

 

• You can buy $10,000 per year per taxpayer.

 

• You buy directly from the US Treasury at this site. Your I-bond is held there, and you will redeem it from this site. I set up a transfer from my checking account to buy the bonds and the proceeds will return to my checking account.

 

• You earn interest each six months that you hold your bond at a rate that is revised every May 1 and Nov 1. I-bond interest is added to your principal value at the end of each six months to yield a new principal balance.

 

• You must hold it for one year from the date you bought it to earn any interest.

 

• When you redeem your bond earlier than five years, you forgo three months of interest: you want to sell when the interest rate you would otherwise earn is not that exciting; you don’t want to hold it and earn interest at a rate you find unattractive.

 

• You can report all of your interest income earned in the year when you redeem the bond.

 

== The 4.3% rate isn’t attractive to me ==

 

My recent, seven-day money market rate is 4.5%. I suspect it isn’t declining any time soon. I would not buy an I-bond at the 4.3% rate, and therefore I should not continue to hold it to earn this rate. I do want to hold my bond long enough to earn – not give up – interest at the last rate of 6.9%.

 

== I’ll earn $842 when I sell ==

 

I will earn $842 on the I-bond that I purchased on May 20, 2022 if I sell it on or shortly after August 20, 2023. I will forego the relatively lower interest earned in May, June and July. That $842 for 15 months works out to a 6.7% annual return rate.

 

== I made an added ~$450 ==

 

Was this a good deal? It depends on where I got the $10,000 to buy the I-bond. I really didn’t have an extra $10,000 sloshing around; I eventually had to sell bonds later in the year to replenish the cash I had set aside for spending in 2022. I sold bonds – shares of my IUSB – at what now looks to be a low point. I complained here.

 

But for this comparison, I’ll assume I used $10,000 that would have otherwise earned money market rates. I estimate that my I-bond will earn and added $450 relative to the alternative of having kept $10,000 in money market for 15 months.

 

 

That’s nice, but I think this is a one-time event for me. I hope inflation ebbs – meaning that I-bond interest rates lower in the future – such that I don’t have to be tempted to buy an I-bond in the future.

 

 

Conclusion: The I-bond interest rate has declined to 4.3% APR. The 4.3% rate is less than I currently earn on my money market. I conclude I would not buy an I-bond at that rate and that tells me that I don’t want to hold my I-bond to earn at that rate. I plan redeem the $10,000 I-bond I purchased last May 20 shortly after August 20: I keep all the $842 interest earned in the last 12-months. I made perhaps $450 more with the I-bond than I otherwise would have made, but it was a bit painful of experience for me.

This post shows that we continue to track to 4% inflation, twice the Federal Reserve’s target. Why do I track inflation? I track the recent trends in inflation since high inflation hurts the ability of companies to earn appropriate returns. Efforts to stamp out inflation will stunt the growth of our economy and corporate profits. High inflation consumes spending power of our portfolios, lowering our chances of increased annual Safe Spending Amounts (SSAs, Chapter 2, Nest Egg Care (NEC).

 

Going deeper: I display a table and the same four graphs that I’ve use to follow the trends in inflation. I add two more this month. This was a good article this week.

 

 

The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.

 

Seasonally-adjusted inflation increased by 0.05% in March. The rate over the last six months translates to an annual rate of 3.6%. We would expect that the 5.6% historical 12-month rate to decline in the next three months, since April, May and June of 2022 averaged 0.8% inflation per month.

 

 

Core inflation excludes volatile energy and food components. The level and trend are more stubborn. Inflation was +0.4% for the month, and inflation for the last six months translates to an annual rate of 4.6%.

 

 

Personal Consumption Expenditures (PCE) excluding Food and Energy was issued this morning. This measure of inflation is one that the Federal Reserve Board favors. The increase for March was greater than February. The last six months equate to 4.2% annual rate.

 

 

== History of 12-month inflation ==

 

Full year inflation measured by the CPI-U shows that inflation for the last 12 months has been 5%. This is a one percentage point decline from last month. The historical 12-month rate has declined each month from its peak of 9.1% last June.

 

 

== Producer’s Price Index ==

 

I add this graph. The change in producer prices will impact consumer inflation. PPI over the last six months is below 0%.

 

 

== Services ==

 

Inflation for services is running fairly steadily at +6% annual rate.

 

 

 

Conclusion: The Core rate of inflation increased by 0.4% in March. Based on the recent six months, the annual rate of inflation is about 4%. This is basically unchanged from last month. Other indicators of inflation are mixed: the producers price index for goods is running no greater than 0% while the services price index is running in excess 6%.

This post summarizes data from the ICI Factbook 2022 that I mentioned last week. Retail investors like you and me are 94% of the capital invested in mutual funds and Exchange Traded Funds (ETFs). Index funds are now almost half the total invested in funds. Equity-only index funds account for 16% of the total value of US stocks. The expense ratio of equity-only index funds is less than one-tenth that of actively managed funds. Investors in index funds keep about 99% of the future growth of stocks, while investors in actively managed funds keep about 91%. Only about 40% of investors are confident enough to make their own decisions as to which mutual funds or ETFs to buy outside of their retirement plan; 60% rely on an advisor to make those decisions.

 

== ICI factbook 2022 ==

 

This is a 250-page annual report from the Investment Company Institute (ICI). The report was issued May 2022 and includes data as of 12-31-2021. The data is self-reported from most all 16,000 US investment companies. The data in the report is >98% of industry assets.

 

ICI divides registered – regulated – investment companies into four groups. 99% of the assets are in a total of 11,500 open-ended mutual funds and Exchange Traded Funds (ETFs). For perspective, there are a total of about 22,000 traded securities in the US: about 4,400 stocks and about 18,000 corporate bonds and US-government notes and bonds.

 

 

An open-ended mutual fund issues new shares at day-end Net Asset Value for new $$$ invested and retires or redeems shares for $$$ withdrawn by investors. Exchange Traded Funds are mutual funds and create and redeem shares in line with new $$$ invested but not on a daily basis; ETF shares trade on stock markets throughout the day.

 

Closed-end mutual funds issue a fixed number of shares that trade on stock markets, similar to EFTs; they are the forerunners of ETFs.  Unit Investment Trusts are similar to closed-end mutual funds; they issue a fixed number of shares but have a fixed termination date after which proceeds from its sale of securities are distributed to shareholders. These two are about 1% of the total assets of the four types of registered investment companies; that percentage is declining over time.

 

== Who invests; who doesn’t ==

 

Retail investors like you and me account for 94% of the assets invested in stock and bond funds. The other 6% is institutional investors: financial corporations – insurance companies and banks are examples; non-financial corporations; non-profit corporations – university endowment funds are an example; state or government employee pension funds; and others.

 

Money market funds are 14% if the total invested in US investment companies. Of the balance, about 75% is in equities (US = ~75% and International = ~25%) and 25% is in bonds.

 

== Self-reliant just 40% ==

 

The report shows that 40% the value of mutual funds held outside of retirement accounts was purchased directly from fund companies or through discount brokers, such as Fidelity, Vanguard, or Schwab. 60% of purchases were though advisors.  

 

 

== Funds equal 32% of all stocks ==

 

US mutual funds and ETFs account for 32% of the value of all US stocks; about 24% of the value of all US and International bonds; 12% of US Treasury notes and bonds.

 

That means 68% ownership of US stocks is not held in registered funds (and 76% of the value of US and International bonds; 88% of US Treasury notes and bonds). Other investors build their portfolios with direct investment in stocks (and bonds):

 

• financial corporations such as banks and insurance companies

• non-financial corporations: Berkshire-Hathaway is a prime example

• non-profit corporations and other entities such as university endowments and state or school employee pension funds.

• hedge funds hold about 10% of the value of all US stocks

• individuals

 

== Index funds increasing share ==

 

The Index funds are an increasing share of the total invested in funds. Index funds are 43% of the total assets invested and actively managed funds are 57%. The 43% for index funds is more than twice that a decade ago.

 

16% of the value of US stocks is held by US-regulated, equity-only Index funds. This percentage has doubled in the past ten years.

 

 

== Index expense ratio is <1/10^th ==

 

The weighted-average expense ratio of equity-only index funds was 0.05% at the end of 2022.  (Data for 2022 from here.) (My broad-based FSKAX is 0.015% expense ratio.) This is less than 1/10^th the weighted-average for actively managed funds, 0.66%. Expense ratios for both have declined over time.

 

 

Assuming the expected return for stocks is 7.1% real return rate, investors in Actively managed funds are giving up about 9% of future growth as fees (0.66/7.1), while investors in Index funds are giving up less than 1% of future growth as fee (.05/7.1).

 

== Load fees ==

 

Some mutual funds are sold by advisors with loads are fees that provide a commission to the advisor. Funds with loads were 8% of all new $$$ invested in 2021 and was 48% of all new $$$ invested in 2000. Most advisor-brokers now are fee-only rather than commission (load) based.

 

 

Conclusion. I summarize the 250-page ICI Factbook 2022. This reported on data ending December 2021. We “retail” investors invest in mutual funds and ETFs. Index funds are almost half that invested; they have grown at the expense of actively managed mutual funds. US equity-only index funds hold 16% of the value of the US stock market; this is an increase from 8% a decade ago. The expense ratio of both Index and Actively managed funds has declined over time. The expense ratio of index funds is less than 1/10^th that of actively managed funds. Investors in index funds keep about 99% of market returns. Investors in actively managed funds keep about 91% of market returns. About 40% of investors are confident enough to be self-reliant, directly investing in a fund from the fund company or from a discount broker; 60% incur the cost of an advisor to make the choices.

The report “Shooting the Messenger” that I mentioned in this blog states that 25% to 35% of the total value of all stocks is held by Index investors. I was not able to follow the math. In this post, I cite a different data source and conclude that Index funds are about 15% of the value of all traded US stocks.

 

== ICI Factbook ==

 

The Investment Company Institute (ICI) issues an annual Factbook. ICI is a trade association of US registered funds. That’s almost solely mutual funds and ETFs.

 

ICI gathers data on total year-end assets and the detail of 350 US stock Index funds and ETFs and 3,000 Actively managed stock mutual funds. It captures the data for 98% of the industry’s assets.

 

== Display: 16% ==

 

ICI displays of the total ownership of US stocks. It shows Index funds at the end of 2021 owned 16% of the total. A pie chart looks like this. Index > Active.

 

 

== Other data calculates to 12% ==

 

Other data I get from the ICI report calculates to 12%. The Factbook calculates the weighted-average expense ratio for both Active funds, Index funds, and the two. This is similar to a graph in the Factbook:

 

 

Armed with this data, one has to use a bit of algebra to calculate the percentage of each that results in the overall weighted average expense ratio. I plot the result that shows the steady growth of Index funds. At the end of 2022 (supplemental data here) Index funds are 36% of the total of Index funds + Active funds. Active > Index.

 

 

The ICI Factsheet – the first page in the Factbook – states the registered Index funds + Actively traded mutual funds hold 32% of the total equity value of all US Stocks. (Not 30% shown on that first display.) Using the multiplication, Index funds are 12% of the total value of all US stocks.

 

 

 

The pie chart looks like this. Active > Index.

 

 

Is this accurate? Are some of the other investors Index investors? No, I assert no portion of other investors are Index investors. I’d argue that big, institutional investors are going to invest in Index funds if they choose to mirror the market. They’re not going to try to build their own portfolio – build their own index fund in effect – to track an index. The operating costs of Index funds and tracking accuracy can’t be beat. A broad-based stock fund that precisely mirrors the S&P 500 or total market costs as little as 0.015% of assets invested: that’s effectively 0.015% reduction of an expected 7.1% real return rate for stocks: investors in those Index funds keep 99.8% of market returns.

 

 

Conclusion: I’ve read different estimates or calculations of the percentage of total US stocks held by Index funds. I think the best data source is the Investment Company Institute’s annual Factbook. I find and calculate two different percentages, but I conclude about 15% of all US stocks are held by Index funds.