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GO BIG OR GO HOME

How ETFs shrunk the stock market

Elizabeth MacBride
Member exclusive by Elizabeth MacBride for ETFs are eating the market

Contributor

Somewhere in Southeast Asia or Brazil or Silicon Valley, the world’s next great entrepreneur is hatching a plan. Two decades ago, the dream would have been to take that invention to the public markets, to an IPO. And investors large and small would have been able to bet on the next big thing.

But that scenario is less likely today than ever before. The number of US companies trading on the market has dropped by more than half since the late 1990s. Deaths are rising: More companies are being acquired once they’re listed. Births are declining: Fewer companies are raising money in the public capital markets, aka “going public.” The average annual number of new listings from 2009 to 2016 is 179, according to data from the Center for Research in Security Prices, compared with an annual average of 683.5 from 1995 to 2000.

The public markets are an increasingly unfriendly space, especially for small companies. Financiers have a name for the phenomenon: “Go big or go home.” One theory is that the shift in the public markets toward passive investing—accelerated over the past decade by ETFs—favors giants and excludes small innovative companies. If the easiest, safest way to make a decent return is to bet on the S&P 500, an investment that ETFs has made even easier and cheaper, why bother to invest in S&P 501?