The Indexing End Game: The Wilshire 5000 Only Has 3,607 Stocks

Featured in Zero Hedge

Daniel Drew,  8/7/2016


   

Numbers and false advertising have a long history: 4.9% unemployment, 2.5% GDP growth, 72 virgins. Now we can add the Wilshire 5000 to the list.

What started with good intentions ended with embarrassment as American economic dynamism collapsed in a cascade of falling profit margins, financial engineering, labor devaluation, and lopsided "free trade" agreements. In 1974, Wilshire Associates created the Wilshire 5000, an index of 5,000 stocks that represented nearly the entire stock market. As new companies went public, the index expanded over the years, reaching a peak of 7,562 on July 31, 1998. Since then, the number of companies has been cut in half to 3,607 as of March 31, 2016. Wilshire notes, "The last time the Wilshire 5000 actually contained 5,000 or more companies was December 29, 2005."

Wilshire 5000

The Wilshire 5000 is now 5000 in name only. Ben Carlson of the Common Sense blog calls it the "shrinkage effect" and blames it on the lackluster IPO market, which is a shadow of its former self. He notes, "From 1980 to 2000 there was an average of more than 300 companies every year that went public. Since then that number has dropped to an average of around 150 a year." It's yet further evidence of what I pointed out last year: The Stock Market Is Disappearing In One Giant Leveraged Buyout. The relentless pace of share buybacks and new highs in the S&P 500 point to nothing less than a slow-motion buyout of the entire market, which will widen the gap between the uber-rich and everyone else.

Index investing was supposed to be the last hope of the small investor. Even Warren Buffett, the Baghdad Bob of capitalism, pitches index funds to the average investor, specifically the S&P 500. The premise is that a diversified portfolio will go up over time, and so far, it has worked for anyone who has stayed fully invested. However, there is one simple problem:
What happens when we run out of stocks to index?
Today, it's the Wilshire 5000 that runs out of stocks. In 10 years, the S&P 500 investment committee will be grasping for shares, urging Larry Page and Mark Zuckerberg to issue D shares and F shares of Google and Facebook just to maintain the facade of diversification in an increasingly undiversified world.