Index Fund Bubble?

[enelson]

Just curious the forum's take on Carl Icahn's commenting that index funds are a current bubble.

Questions I've thought of:

1) At what percentage point do index funds own so much of the market that there really is no free market setting reasonable prices for individual stocks?

2) Does the predictable buying of stocks by large index fund players allow they or others to "time the market" in any way?

[Peds]

1) 100%

2) depends on the index.

[Dr.V. Investor]

i am surprised no one has answered this.

1.  Now.  passive investing is piggybacking on the work of others.  however, majority on this site believes active managers are not necessary. currently, almost all types of active management strategy are not beating the index.  why?  because everyone is buying the same thing.  it does not matter if the company is hemorrhaging money, if it's in the index, just buy it.  however, when the music stops- when everyone holds buying the dip, who will indexers sell to?  they basically annihilated active managers - very few have capital.  Many active managers threw the towel as well and just tried to do the index since they cant beat it. It will be definitely interesting and it is evolving now.

https://www.forbes.com/sites/adamsarhan/2016/10/18/the-biggest-problem-with-passive-investing-that-no-one-is-talking-about/#4bd0669066c0

https://www.cnbc.com/2017/11/14/robert-shiller-passive-investing-is-a-dangerous-chaotic-system.html

https://thefelderreport.com/2017/06/06/podcast-steven-bregman-on-the-greatest-bubble-ever-passive-etf-investing/

 

 

[East coast]

Dr.V. Investor wrote:

i am surprised no one has answered this.

1.  Now.  passive investing is piggybacking on the work of others.  however, majority on this site believes active managers are not necessary. currently, almost all types of active management strategy are not beating the index.  why?  because everyone is buying the same thing.  it does not matter if the company is hemorrhaging money, if it’s in the index, just buy it.  however, when the music stops- when everyone holds buying the dip, who will indexers sell to?  they basically annihilated active managers – very few have capital.  Many active managers threw the towel as well and just tried to do the index since they cant beat it. It will be definitely interesting and it is evolving now.

https://www.forbes.com/sites/adamsarhan/2016/10/18/the-biggest-problem-with-passive-investing-that-no-one-is-talking-about/#4bd0669066c0

https://www.cnbc.com/2017/11/14/robert-shiller-passive-investing-is-a-dangerous-chaotic-system.html

https://thefelderreport.com/2017/06/06/podcast-steven-bregman-on-the-greatest-bubble-ever-passive-etf-investing/

 

 

Click to expand...

First bolded comment is a fundamental misunderstanding of the boglehead philosophy followed by most here. Active managers are necessary. An individual active manager certainly can and does beat the average (though we can't, on average, predict the ones that will). Also as fees have skyrocketed over the past generation, the chances of an active manager beating the index net of fees has greatly diminished.

2nd bolded comment ignores the historical context of index investing - they aren't just beating the active funds "currently". they've been doing it for a while.

3rd - I work in the broader space. Active managers are my clients. While there certainly is consolidation, to state that they've annihilated them is extreme hyperbole at best and fear mongering at worst. Active investing is still significantly more than 50% of the invested stock assets. Comp is trending downwards, so these PMs and Analysts are only bringing home 400-700k a year instead of 700k-1m a year. No one is crying for them. We've never been busier!

[jz]

Active management will continue to flourish because there will always be egos to feed. Many will step forward to prove their superiority.

[ajm184]

1. I believe there was an article by GMO discussing this point within the past year'ish.  Their estimate was like 65% - 75% of a market trades being index related would start to have an impact.  Given the US is like 25% to 30%, there is a long way to go.  As others have stated, there are plenty of people who are a. smart or b. think they are smart to keep a viable price discovery mechanism in place.

The interesting thing in my mind is how 'active' traders perform in a higher volatility environment?  An argument by active trading community of recent poor aggregate performance has been low volatility.

2.  I would guess traders would love to front run someone like Vanguard.  Figuring out how to do so without getting run over is the dilemma.  Picking up pennies in front of a steamroller.

[Hank]

Yep, active traders can play a role in getting assets to the "right" price.  If anything, Vanguard and a few other indexers plodding along trying to capture market returns should result in more opportunity for the remaining smart active traders, not less.  Then again, how many active traders can consistently outperform their relevant index on a risk-adjusted, after fee, after tax basis without the use of insider information?

[The White Coat Investor]

I think index funds are something like 30% of the market right now. I'm very confident 70% actively managed is enough to keep the market efficient enough that indexing is the way to go. I guess if indexing were 90%+ I might start worrying about it.

Can't front-run Total Stock Market, but you can the 500 index fund.

[ajm184]

Toe Cheeze wrote:

30% is way past the point of being too big.

Click to expand...

This is based on opinion or a factual analysis of behavior?  GMO may or may not be correct in their estimate/assumptions, but at least they are making a rigorous factual analysis.

[ChristopherMD20]

I am commenting just to follow as a novice. New to investing and retirement planning. I thought indexing was the way to go... Set it and forget it... I hope this isn't wrong

[Tabaxus]

I take "comfort" in knowing that (a) I certainly have no confidence that I could beat the market; (b) I have no confidence that I am smart enough to be the guy that happens to find the right investment manager to beat the market; (c) as long as I have no confidence that I can actually beat the market, at least I'm only paying whatever the AUM is on Vanguard's mutual funds; and (d) if Vanguard's mutual funds tank and don't recover, everyone is screwed anyway, and the only effective investment would've been bunkers, bullets, and beans.