This past month, I’ve been playing around with the Federal Reserve’s Flow of Funds data. I thought it would be interesting to discuss some descriptive issues in financial ownership and portfolio allocation (and to showcase some graphs I’ve made). The goal of this post is to explore such questions as: Who owns the stock market? Have households increased their stock ownership over time? How does stock ownership differ from bond ownership?1
For starters, I break down the ownership of the US domestic stock market:
A couple observations:
No, not exactly. First, the Federal Reserve’s “household” sector is a broad designation that also includes things like nonprofits and some private equity, so it’s not exactly equivalent to “retail investors” or whatever else you might think when you hear the word “household”.3 Second, households own a little more than half of mutual funds, so at least part of the decline in household stock ownership is simply due to households choosing to gain exposure to financial markets through intermediaries (i.e. mutual funds) rather than through direct holdings. Third, this charts total ownership, not the ownership of a typical household. If one sector gets wealthier, but has no change in the fraction of its wealth it allocates to stocks, it will end up owning more of the stock market. Additionally, the behavior of a few ultra-wealthy households may drive much of the results.4
To dig deeper into these distinctions, let’s first investigate the hypothesis that households only appear to own less of the market because they choose to gain exposure through ETFs/Mutual funds rather than through direct holdings.5 As before, I chart the direct ownership of the stock market by households, but now add a line that adjusts this fraction to include household stock ownership through mutual funds. For example, suppose households own 20% of the stock market directly, but own 50% of mutual funds, which themselves hold 10% of the stock market. Then the ‘direct’ ownership is 20%, and the “adjusted” ownership is 20% + 50%*10% = 25%.6
Comparing the two lines makes it clear that a great deal of the shift, at least post 1980, is indeed due to reallocation to these intermediaries. But this clearly does not explain the long time series results (e.g. 2020 vs. 1960).
The second candidate hypothesis is that these dynamics are driven by changing portfolio weights. By looking at the fraction of its financial assets each sector allocates to equities, we can understand the extent to which changes in ownership are driven by changes in asset allocation as opposed to say, changes in wealth. Below, I’ve plotted the time series of the fraction of financial assets invested in stocks for various sectors in the Flow of Funds data.7
Looking at the equity allocation by sector makes it clear that the decreasing ownership of households is not really explained by big changes in the fraction of financial assets allocated to stocks; if anything, this fraction has increased since the 1960s. So the change in ownership is more likely to be driven by size/composition effects, i.e. the large increase in foreign investor participation, than by changing asset allocation.
Finally, we can also speak to the difference in the “typical” household vs. the aggregate household sector by bringing in additional survey data. Economists (rightfully) tend to distrust a lot of survey data, but the Federal Reserve’s Survey of Consumer Finances is the gold standard. This triannual survey collects (and verifies) detailed balance sheets from the participants it interviews. Since the participants are individuals drawn at random from the US population, this data is useful for capturing the cross-section of financial behavior among households. Consider what this survey shows about the fraction of households that own various financial assets:
