Introduction

Index-based investment strategies have become a defining feature of modern equity markets. Their expansion has granted indexing a substantial footprint, particularly in the United States, where explicitly index-based domestic mutual funds and exchange-traded funds (ETFs) accounted for 18% of total stock market capitalisation as of year-end 2023. Previous research suggests the true figure could be twice as high when including “closet indexers” and non-retail funds. However, identifying these ownership stakes in individual firms on a global scale remains challenging due to cross-border investment, less concentrated asset management industries abroad, and the proliferation of diverse benchmarks. The rapid growth of indexing has generated significant interest regarding its effects on corporate governance, liquidity, and price formation across different legal and capital-market structures.

Data and measurement

The study utilises a comprehensive dataset of portfolio holdings from S&P Global Market Intelligence, covering 99.7% of public companies globally from 2004 to 2023. The researchers introduce a new, benchmark-free procedure to classify investors as index or non-index based. This method relies on four portfolio characteristics: Variance (within-portfolio dispersion of ownership shares), Position Changes (dispersion of proportional changes in holdings), Turnover (ratio of purchases plus sales to portfolio value), and Portfolio Holdings (the number of distinct securities held). These are supplemented by an indicator variable that uses a machine-learning algorithm to assess whether fund business descriptions or names suggest index tracking.

The resulting model identifies index-based investors with 98% accuracy and achieves a value-weighted agreement with Morningstar classifications of 98.4%. This approach sidesteps the need for third-party style classifications or the identification of specific benchmarks, which is particularly useful for non-US markets where indexing is more fragmented across national, regional, and global benchmarks. The model distinguishes between “explicit indexing”, involving funds that openly state index-tracking goals, and “closet indexing”, which includes portfolios exhibiting index characteristics without explicit reporting. Closet index funds typically tend to charge higher fees and underperform compared to their explicit counterparts.

Empirical patterns in index ownership

Analysis reveals that global index ownership increased from 3.0% of market value in 2004 to 16.9% by 2023. By the end of 2023, index-based investors held 10% or more of more than 5,300 firms globally. The expansion has been consistent, shifting index ownership from a rarity to a commonplace occurrence. In 2004, only 232 firms globally had index-based ownership of 10% or more, and only 19 of these were outside the US. By 2013, this number rose to 2,416 firms. At the end of the sample period, half of the firms exceeding the 10% threshold were located outside the United States.

Growth has been uneven across countries. In Europe, Switzerland and the United Kingdom have exceeded 15% index ownership of market value, whereas other Western European countries have only passed 10% in recent years. In Asia, Japan has experienced a notable rise, while Taiwan and Singapore are approaching 10%, and South Korea and India now exceed 5%. In contrast, China has seen little growth in indexing since 2010. The study also identifies closet indexing as a significant factor outside the US. In Europe and Asia, explicit and closet index ownership have both increased substantially and by similar magnitudes, whereas US growth is driven almost entirely by explicit indexing.

There are distinct cross-sectional patterns related to firm size. In the US, the relationship between market capitalisation and index ownership is concave, with ownership peaking at around 30% for mid-cap firms worth a few billion euros before declining for the largest entities. In Europe and Asia, the relationship is monotonically positive, meaning index ownership increases with firm size and remains concentrated among the largest firms. The study finds that differences in market capitalisation and free float help explain these regional variations. For instance, the value-weighted average free float is 91% in the US, compared to 74% in Europe and 53% in Asia. Higher levels of insider ownership, which averages 12.3% of shares in the sample, contribute to lower index ownership by reducing the pool of shares available for public trading.

Conclusion

The research concludes that the United States is unusual both in its high level of index ownership and the types of firms held by index investors. While US indexing extends far down the market-capitalisation distribution, indexing in Europe and Asia remains concentrated in large-cap stocks. Market capitalisation and free float are identified as the strongest predictors of index ownership at the firm level, while trading volume, dividend status, and profitability provide little incremental explanatory power. Every 15 percentage points of free float increases index ownership by approximately one percentage point. These findings suggest that research results based on the US market may not easily generalise to other regions. The developed global panel provides a foundation for future study into the consequences of index ownership on corporate governance, market efficiency, and financing outcomes across different markets.