One CIBC portfolio strategist says a shrinking active investor base could be disincentivizing initial public offers (IPOs). 

During an interview with BNN Bloomberg on Monday, Ian de Verteuil, head of portfolio strategy at CIBC Capital Markets, said that approximately 40 per cent of the U.S. market is “passive at this stage.” In Canada, he said, the number is “probably half of that. So Canadians are not as passive as you think.”

CIBC’s database traces “every single mutual fund, and every single ETF, anywhere in the world,” de Verteuil said. Through this extensive database, CIBC determined that passive investments have roughly doubled. “In some parts of the market, it probably tripled,” he said. 

“We think it’s about 20 per cent. So one in every five shares that’s traded on a public company in Canada is actually passively run,” he told BNN Bloomberg. 

“When I say passive, that can be a sector fund (or) that can be (an) ESG fund,” he explained, adding that these investments are typically tied to quantity-specific trading structures that “make stocks move a little more in unison.”

This, he said, “has some implications in the IPO market.”

“One of the reasons we’re seeing, for example, such concentration — even the S&P500 — (is) we aren’t creating those new entities.”

He believes the structure of market ownership is driving market concentration on passive investments. 

“I am not here saying that individual investors are making bad decisions. I’m saying I want an ETF product where the fees are lower. I just want market exposure. Get it for me at the cheapest price. I’m not saying that’s right or that’s wrong,” he said. 

“There certainly is a fair amount of criticism of the active mutual fund industry when you think about those things. But by the same token, when you look at ETFs, what are we benchmarking you against?”

De Verteuil explained that the status of a public company is not always so apparent. 

“Think of all the hedge funds, think of all the private sector pension plans who don’t disclose, so there’s only a proportion of the market that we’re able to get at,” he explained. “That part, where there’s a reasonable amount of visibility, is mutual funds and ETFs — whether domestic or international.”