A Growing (and Profitable) Asset Class in a Dwindling Stock Market

From the Baltimore Clubhouse – It’s getting harder and harder to make money in the stock market.

Yes, yes, you say. The correction of the last two months is killing everybody. Tell me something I don’t know.

But that’s not what I’m talking about.

I’m talking about a 40-year trend.

Every year there are fewer choices in the stock market for investing your money, and they’re potentially less lucrative to boot.

(There is an asset class where choices are growing – more about that below.)

But back to stocks for a moment.

The U.S. economy has been growing steadily for decades. The population rises every year.

But not the stock market.

In 1976 there were nearly 5,000 publicly listed companies for investors to choose from. By 2016 that number had fallen to about 3,600.

Let me put that another way. Over those four decades, the U.S. population increased from 219 million to 324 million. So the number of public companies should have increased to reflect that growth, right?

It didn’t. During that period, the U.S. went from 23 public firms per million inhabitants to about 11.

Why has this happened? A prevailing theory is that firms today invest much more heavily in intangible assets. These types of assets – brand recognition, trademarks and patents – are much trickier to fund via public offerings than traditional industrial assets like factories and equipment.

Essentially, going public is just not worth the hassle for many new companies.

Worse, earnings among publicly traded companies are becoming heavily concentrated at the top. In 2015 the total earnings of the top 200 public firms exceeded the earnings of all public firms combined. These 200 are generally larger and older – and slower-growing – firms.

They dominate the market now more than ever.

Do you want more choices in your investments? More dynamism? Greater upside potential?

Those are becoming increasingly rare in the stock market.

So, where can you find them?

In exchange-traded funds, or ETFs. The number of ETFs worldwide has skyrocketed in recent years, from under a thousand in 2006 to more than 4,500 today.

And as you can imagine, the money pouring into ETFs is also astounding. From about $1 trillion in 2009 to nearly $4.5 trillion today.

Why are ETFs so popular?

“ETFs represent the single most investor-friendly development in the history of investing,” The Oxford Club’s ETF Strategist Nicholas Vardy says.

They’re much cheaper than traditional funds – nearly free in many cases.

They also allow you to be enormously creative – investing in any asset class or strategy anywhere in the world. Even combining asset classes in a single ETF to capitalize on a trend or development and get the best return.

These methods just aren’t available using traditional stocks (or mutual funds), especially today with a shrinking stock market and fewer choices.

ETFs’ sheer flexibility is partly responsible for their rapid proliferation. There are ETFs for Republicans, Democrats, doomsayers, eternal optimists, “biblically responsible” investors, video game enthusiasts and marijuana investors.

But those are the oddballs. More mainstream ETFs can target specific sectors – energy, metals, emerging markets, biotech, etc. They can also bet on trends – urbanization, aging populations, climate change, trade… you name it.

Nicholas says investing in individual stocks is like playing checkers – with similar pieces moving in one direction. ETFs turn that into a chess game, with multiple asset classes moving in different directions.

If there were an ETF to bet on ETFs themselves, I’d buy it. They’re the future.

Good investing,

Matt