On the Percentage of Market Cap held by Domestic Stock ETFs

I don’t have all the resources that I would want in order to do complex analyses.  Give me the database, and the right software, and I can do amazing things.

Even with limited data, and cruddy software, I still have something interesting this evening.  On January 21st, I made measurements of domestic equity ETFs to try to analyze what percentage of domestic equities were held by ETFs.

In order to limit my efforts, I polled the largest 61 domestic stock ETFs, excluding funds that are leveraged or inverse.  (those don’t buy/sell the equities directly, but use derivatives.  Granted, the derivative seller has to hedge, but he very well may cross hedge, messing up the estimates.)  That accounted for 90% of the markets cap of ETFs.  I then took the actual stock holdings of the ETFs and aggregated them, and then compared those holdings to the market capitalizations of the underlying stocks themselves, ending with a percentage of each stock held by the top 90% of ETFs.

I then ran a regression of that variable on several other variables.

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.655372491
R Square
0.429513102
Adjusted R Square
0.428951442
Standard Error
0.013189645
Observations
7,118.000000000
ANOVA
df SS MS F Significance
F
Regression
7.000000000

0.931250612

0.133035802
764.719743739 -
Residual
7,110.000000000

1.236903529

0.000173967
Total
7,117.000000000

2.168154141
Coefficients Standard
Error
t Stat P-value Lower 95% Upper 95%
Intercept
0.002247578

0.000264739

8.489772940
0.000000000 0.001728610 0.002766546
shr insd
(0.000086814)

0.000017370

(4.997942180)
0.000000593 (0.000120865) (0.000052764)
beta
0.001683951

0.000182311

9.236686447
0.000000000 0.001326567 0.002041335
shr inst
0.000292763

0.000005154

56.804885114
- 0.000282660 0.000302866
mktcap
(0.000000003)

0.000000018

(0.151538794)
0.879555010 (0.000000039) 0.000000033
3m avg volume
(0.000000002)

0.000000002

(1.282295801)
0.199780706 (0.000000006) 0.000000001
3m realized volatility
0.000076315

0.000005765

13.237614053
0.000000000 0.000065014 0.000087616
Float/Shs
0.000001184

0.000002810

0.421210862
0.673613846 (0.000004325) 0.000006693

In short, I learned that ETF holdings of stocks were:

  • Inversely proportional insider holdings
  • Proportional to the stock’s beta, realized volatility, and amount held by institutions, and
  • Seemingly not related to market cap, trading volume or float.

Even the intercept term has some value as it is near the actual average percentage of market cap held by the top 90% of ETFs, which was 2.15%.  Assuming the same proportion applies to the last 10% that would mean that domestic stock ETFs own 2.39% of domestic stocks.  That’s enough to affect pricing at the margin.

Now, that percentage held by the top 90% of domestic ETFs in any common stock was as high as 17.9%, and as low as zero.  In terms of percentage of market capitalization held by the top 90% of domestic ETFs, we hit zero at stock 2912.

Implications

  • Domestic stock ETFs tend to pick more volatile stocks.
  • Domestic stock ETFs tend to pick stocks held by major institutions.
  • Domestic stock ETFs tend to pick stocks less held by insiders.  (They tend to be more boring.)

My summary is that those who create ETFs, even the big successful ones, tend to follow trends.  By their nature, they are extrapolating from what worked in the past, but in the process of doing so, end up overchoosing some names, and in the process add to their volatility.

That’s all for now, I still don’t feel well.