Where is the money coming from?
It’s the question Karen and I had down in Cabo ahead of Thanksgiving as we observed the hillsides overlooking the Sea of Cortez now festooned with elegant homes. It wasn’t that way the last time I visited 25 years before.
Out of curiosity, we checked what those homes cost. Stunningly, you could pay over $12 million. A driver told us a lot of it is the cartels. Crime pays I guess. It’s not all cartels. There are a lot of Americans in Baja California Sur.
Speaking of money, assets in Exchange Traded Funds (ETFs) topped $13 trillion in October, says the Investment Company Institute. ETFs are being created and redeemed at nearly a trillion-dollar monthly pace.
For those attending the NIRI Senior Roundtable in San Antonio starting today, we’ll talk about it tomorrow. I’m on a panel with Mike Green, Simplify Asset Management, about the impact of Passive money.
Where is all that money coming from?
According to data from Morningstar and the Investment Company Institute, Passive funds saw inflows of nearly $400 billion for the year ended September 30, 2025, while Active funds had outflows of about $350 billion.
I’ve got a slide supporting my discussion tomorrow showing the long-term trend (if you’re interested in my short supportive deck, drop me a note).
Let me throw out some math. (Speaking of math, I again over the Thanksgiving pause watched the movie “The Martian” from Andy Weir’s genius book of the same title. It’s such a wildly entertaining film on overcoming obstacles.)
Zeroing in on September using Morningstar data, Passives had inflows of about $25 billion, Actives saw about $36 billion exit, for a net decline in equity investment in US stocks.
Yet in September as money LEFT stocks, the supply of ETFs increased by over $140 billion in the month alone. That’s netting the $669 billion of gross creations against the $527 billion of gross redemptions.
Hm. A math problem for our Martian hero Mark Watney (Matt Damon) to solve.
How can the supply of ETFs vastly exceed the flow of funds? Where is the money coming from?
Part of the answer is the number of ETFs keeps spiraling up. In October 2024, there were 3,500 ETFs trading in the US stock market (more than the number of individual companies when you back out multiple classes of stock). Now it’s 4,300.
Eight hundred more ETFs in a year.
I can’t help but conclude that at some point there will be a consequence for this disconnect. Money shifts out of equities to bonds, let’s say. It’s not a stretch. More money went to passive bond funds than equity funds in the past year, the data say.
So then how is it that ETF shares and flows never cease growing in stocks?
It’s the same head-scratching question I’ve got looking at Cabo, the Wash Park neighborhood in Denver, our home turf in Steamboat Springs. Where is all the money coming from?
I’m not saying it’s a Michael Burry Moment. You know the guy from Michael Lewis’s The Big Short who correctly deduced the housing market would blow up. He said last month he would close his hedge fund.
Burry said, “My estimation of value in securities is not now, and has not been for some time, in sync with the markets.”
I’m sure his conclusion and the math on flows to ETFs are related. ETFs don’t pick stocks per se. Yes, “active” ETFs can accommodate stock-pickers who create a daily transparent basket that provides a valuation mechanism.
But all ETFs are substitutes for underlying assets. If the number of components comprising the pool declines while the number of instruments dependent on that pool rises, what’s the consequence?
For one, the components of the pool will rise in value. Valuation metrics will break down. We have as of today 129 stocks (down from a peak of 133) with market capitalization of $100 billion or more. Around Nov 20 it dropped to 122 and then suddenly snapped back.
Those 130-ish are 75% of total market cap. That’s a consequence. It explains why valuations keep rising in the stock market. Everybody owns the same stuff.
So what to do, public companies? At the very least, you need to have the DATA on the impact of these forces on your equity. And a strategy, a plan.
And investors, fundamental valuation metrics will lead you to Michael Burry’s disconnect. Pay attention to Demand and Supply, not price.
