Goldman Sachs stated that looking at the US stocks as a reference, the real estate industry has the highest passive holding proportion, while the energy industry has the lowest. The passive holding proportion of large-cap stocks is relatively small, and the impact of passive holding on the s&p 500 index stock trend is not significant. s&p 500 index stocks with high passive holdings do not consistently outperform stocks with low passive holdings.
A-shares have sparked a wave of passive investment, with passive fund products growing rapidly this year, holding a market cap exceeding active funds. As of 10/25, the capital inflow of stock-type ETFs exceeded 850 billion yuan, becoming an incremental funding force in the market that cannot be ignored.
What changes will the rise of passive investing bring to A-shares? Taking cues from the US stock market, passive investment has surged over the past decade, what impact does it have on the S&P 500?
Goldman Sachs has provided a detailed interpretation in its latest report on various aspects such as capital trends, changes in shareholding proportions, industry levels, market structure, and trading behavior. For example, passive holding funds typically flow into the real estate industry, with a small proportion held in large-cap stocks, and the correlation of passive holdings to the S&P 500 is not significant.
Overall, although the rise of passive investing has changed market structure in some ways, its direct impact on stock valuations and trends is not significant.
The following are seven key points summarized by Goldman Sachs:
1. Capital trend: Over the past decade, passive equity funds and ETFs have accumulated inflows of 2.8 trillion USD, while actively managed funds have seen outflows of 3 trillion USD. This trend has accelerated over the past five years, with passive funds receiving inflows of 1.6 trillion USD, compared to just 1 trillion USD in the previous five years.
2. Changes in passive holding proportions: The passive holding proportion of regular companies in the S&P 500 index has risen from 18% twenty years ago to the current 26%. Based on dollar-weighted calculations, 24% of the market cap of the S&P 500 index is held by passive funds.
The passive shareholding ratios vary across different industries and market caps, with the real estate industry having the highest passive shareholding ratio and the energy industry the lowest. Although the energy industry's passive shareholding ratio is relatively low compared to other industries, it has experienced the largest change in passive shareholding over the past decade (+8 percentage points).
Stock styles and holdings types: Large-cap stocks have a lower passive shareholding ratio. By market capitalization weighting, the passive shareholding rate of the 7 largest stocks (Mag 7) in the S&P 500 index is currently 22%, while the remaining 493 stocks in the index are at 25%. There seems to be a slight negative correlation between market capitalization and passive shareholding among all S&P 500 index stocks. Moreover, only 6% of the passive shareholding changes can be explained by changes in market capitalization.
Passive shareholding and market performance: The impact of passive shareholding on the correlation of S&P 500 index stocks is not significant. Usually, in market environments where company-specific fundamentals determine performance, stock correlations are low, while in macroeconomic factors such as economic growth affecting the entire stock market in a similar manner. The time series of the correlation of S&P 500 index stocks shows a decreasing trend over the past decade, reaching a low point of 0.08 this year, similar to lows in 1995, 2000, 2006, 2007, 2017, and 2018.
Passive shareholding and valuation multiples: In the S&P 500 index, after controlling for fundamentals, passive shareholding does not help explain any additional changes in valuation multiples. Regression analysis of S&P 500 index stock price-earnings ratios with earnings growth expectations, duration, earnings stability, profit margins, and asset turnover ratios suggests that fundamental indicators today explain 50% of the variation in valuation multiples. If we incorporate changes in passive shareholding into this framework, it does not help explain any incremental changes in multiples.
Levels of passive shareholding: S&P 500 index stocks with high passive shareholding do not consistently outperform stocks with low passive shareholding. Goldman Sachs constructed an equally weighted industry-neutral factor to test whether stocks with high passive shareholding outperformed the corresponding stocks with low passive shareholding. Data used to calculate passive shareholding ratios are released quarterly, and the factor is rebalanced at the beginning of each quarter based on data covering the respective quarter. Performance has been inconsistent since 2000, with stocks with high passive shareholding outperforming those with low passive shareholding before 2014, then stabilizing and subsequently giving back most of the early 2000s gains.
Market structure: Trading of passive investment instruments does not always reflect passive buying. During periods of high stock market volatility, Goldman Sachs analysts found that ETF trading accounts for a significant proportion of overall trading compared to low volatility environments. In the past year, ETF trading accounted for 28% of the trading volume. However, not all ETF trades are passive. For example, hedge funds use ETFs to hedge individual stock short positions.Options strategy.Advisors have found that during periods of high stock market volatility, ETF trading represents a significant portion of the trading volume compared to low volatility environments. In the past year, ETF trading volume accounted for 28% of the total trading volume. However, not all ETF trades are passive. For example, hedge funds use ETFs to hedge individual stock short positions.
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