Here’s a pop quiz for you: How many stocks are in the Standard & Poor’s 500 Index? Hint: There’s a big clue in the name of the index. If you answered “500”, you’re correct! That was too easy, right? OK, here’s another one: How many stocks are in the Wilshire 5000 Index? The answer is somewhat surprising, and it reveals an ongoing dynamic at work in the US equity market.

Unlike the S&P 500 index which strives to maintain a constant number of 500 company stocks, the Wilshire 5000 was named for the approximate number of securities it happened to hold at its inception in 1974. From around 5,000, the number of Wilshire index components actually grew over time, reaching its zenith on July 31, 1998 with 7,562 stocks. But the last time the Wilshire 5000 actually contained at least 5,000 stocks was December of 2005. Today, the Wilshire 5000 index contains less than half of the peak amount — only about 3,618 individual stocks. What happened to the ‘missing’ stocks?

To put it simply, the shrinking number of Wilshire 5000 Index components reflects an ongoing trend in the US stock market itself. After peaking in 1996, the total number of publicly traded US stocks has been declining for 20 years, and now stands at fewer than 3,700. The proximate causes are more mergers, acquisitions, and de-listings that remove companies from exchanges, plus fewer listings through initial public offerings (IPOs). But the real question is why more companies are choosing to de-list from an exchange, or to stay private altogether.

A recent, comprehensive study from Credit Suisse that examined the reasons behind the shrinking pool of US equities noted that, unsurprisingly, companies perform a cost / benefit analysis when it comes to the listing decision. The main benefit to listing on a public market is increased access to capital, liquidity and a larger pool of potential investors. Costs include substantially increased regulatory burdens, exchange fees, and the higher costs of mandatory investor communications. As these costs have risen in recent years, companies are choosing to delay listing or remain private in ever greater numbers. Today’s very low interest rate environment is also playing a role — by decreasing the cost of debt financing, companies are finding it easier to acquire each other’s shares, as well as buy back their own stock. This further reduces the number of outstanding shares available for public investing.

Interestingly, as a consequence of this decreased propensity to list, the very nature of the US market itself has evolved since the late 1990’s. There are far fewer publicly traded companies today, and those that remain tend to skew larger, older, and more profitable, as these are the kinds of companies that are more able to bear the higher costs of listing on an exchange. However, as evidence-based investors, we know that some of the best investment opportunities come from holding a portfolio that includes a healthy allocation to smaller, low-priced stocks with higher expected returns. These are exactly the kind of stocks that are getting harder to find in the US market. More and more, investors may need to look beyond the borders of the United States to ensure sufficient exposure to that segment of the market.