WHY HAVE U.S. HOUSEHOLDS INCREASINGLY RELIED ON MUTUAL FUNDS TO OWN EQUITY?

Authors


  • Note: I would like to thank an anonymous referee, Bart van Ark, Edward Wolff, Jennifer Afflerbach, Nathan Balke, Ricardo Llaudes, Leonard Nakamura, David Simon, and Alan Viard for making helpful suggestions. The paper also benefited from what I have learned about mutual funds from Sean Collins, Sarah Holden, John Rea, and Brian Reid. I thank Jamie Lee, Ricardo Llaudes, and Dan Wolk for providing excellent research assistance. I especially thank the Investment Company Institute for providing some of the data used and numerous people at various mutual funds who provided historical data on the equity funds in my sample. The views expressed are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any remaining errors are my own.

*John V. Duca, Vice President and Senior Economist, Research Depart- ment, Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX 75265-5906, USA (john.v.duca@dal.frb.org).

Abstract

U.S. households have increasingly used mutual funds to own equity outside of retirement accounts owing to two developments. The first is a decline in equity mutual fund loads, which are negatively correlated with stock ownership rates, which have doubled owing to greater ownership through mutual funds. The second is improved confidence in future family finances. Both effects are consistent with recent models of equity participation, in which lower asset transfer costs and lower income risk induce equity investing by middle-income households, who—in practice and owing to diversification considerations—are more likely to indirectly hold stocks through mutual funds.

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