Having founded and managed a mutual fund company, I can see the writing on the wall.  A wave of ETF selling has taken place (and will likely continue) because it’s easy to pull the trigger on a publicly traded fund.  For most investors, it takes time for information to #1 sink in (statements come in the snail mail); and #2 it means deciding to get the paperwork, often through third party reluctant to lose the business, underway.  There’ll be more to redemptions than just requiring some cash to weather the coronavirus storm.

Mutual funds had about $20 trillion in assets under management before markets dived, compared to only $4 trillion in ETF’s.  The problem is there are more mutual funds than there are US companies to invest in.  In previous articles, I’ve mentioned how the number of public companies (saddled by increasing compliance costs and the nuisance of being public) has been shrinking over the years.

Not so much the number of mutual funds, which has actually grown over the years. There are nearly 10,000 mutual funds and less than half that many US publicly-listed companies.

Fortunately, many mutual funds of course invest globally, but that doesn’t change the reality that an awful lot of money is invested in funds which invest in a limited (and declining) number of stocks.  According the the World Bank, the market cap of all publicly listed companies is only about $70 trillion globally.

It’s one thing to read about the market turmoil in the press, it’s quite another to see you 401K savings (or RRSP’s in Canada) crushed on your monthly statement.  The 2 year annual return this go around will be a negative number.  Those relatively new to the markets will do what they always do when confronted by the reality of downside volatility – want out of equity funds altogether.  I’ve witnessed this many times over the decades.

So far it has been the pros who have been driving markets, but over the next few months it will be the average investor who pushes the envelope and they’ll be inclined to push it right off the desk.