As a finance PhD student, I don't think I can explain this issue as well as you do. I also think your explanation is better than quite a few finance professors who work in the mutual fund literature.
@@BenFelixCSI I am working in household finance and empirical asset pricing, so I also need some working knowledge in the mutual fund literature. I have come across a couple of working papers that try to model index bubbles, but I always find them skeptical, in the sense that they do not consider Grossman-Stiglitz paradox. (Those models usually need short-sell constraints or the limit-of-arbitrage argument to rule out active price discovery after indexing peaks, which sounds odd.) Any way, thanks for replying. I have been following your TH-cam channel for a while. Really appreciate your clear tone on a wide range of finance topics.
Thanks. It’s great to know that you’re watching. I am working on a video concept where I will walk through the importance of theory to empirical results into context, and then empirically testing the theory. I think that most people (non academic) fundamentally misunderstand how this works in economics, which makes them more likely to dismiss foundational research like EMH as useless.
3:41 - This was a real lightbulb moment for me. AUM doesn't drive pricing, trading does. How did I not see that before? It's such an obvious refutation of the Burry Bubble clickbait. Thank you for shedding light on the F, U and D surrounding this whole thing.
@9:42 "If the market is broken..." Yes, but if passive investing has unfairly boosted the price of mega-caps then that trend may have a lot further to run. Anyone tilting to small caps is effectively short a long-term structural trend. Small caps may indeed be cheaper than they would be if passive hadn't been invented, but they can get a lot cheaper if the the migration to passive persists...
Well, even if you assume that 2008 "Big Short" heroes like Burry are credible with future predictions, doesn't work well:) Another "2008 Big Short hero" says opposite today. th-cam.com/video/uQcBDFKoMIE/w-d-xo.html
Excellent analysis as usual. Most index investors are probably long term holders and will gladly buy weakness, not rush for the exit. No comparison with CDO toxic assets of 2007. Thanks for this great video Ben.
Reminds me of the 2008 housing crash where all the 'experts' were swearing that the market was fine and normal..."buy now or be priced our forever" ...we shall see, but the very few will be making a killing again!
I see that the most important arguement in this video is that Trade volume is responsible for price discovery (not AUM) which is true. You also make the important claim that indexing makes up a relatively small amount of trading volume. All your arguments are spot on. The only interesting im left thinking about though is that how some large cap "popular" stocks (e.g. Amazon, Google, etc) could have their prices distorted not only from the ~5% of trading done by passive index funds, but also the mountains of actively managed mutual funds sold by financial advisors all over North America. I would bet that would make up quite a bit more trading and therefore have quite the effect on pricing (maybe distortions) because certain stocks are owned by such a crazy large amount of mutual funds.
Great video as always! The bubble claim was obviously dubious (per definition, it would have been the underlying stocks that were bubbled - comparing index funds to subprimes was ludicrous), but that index funds could introduce a (temporary) distortion sounded more credible. You brought an important perspective by analyzing the trades and not only the assets under management.
@Luís Andrade I never said stocks couldn't be bubbled (or at least overvalued): what I said is that if (broad, diversified) index ETFs are indeed bubbled, ipso facto stocks in general are bubbled (because there is no reliable way to tell which are trading at fair value if the markets are "efficient enough"). It's somewhat ironic when people both freak out by "money printing" and increased valuation of assets... where do you think all that increased liquidity goes if inflation remains low and consumption/production doesn't scale up proportionally? There is no way to tell whether or not asset valuation are "too high" or "too low" at any given moment before the fact and if someone thinks we're on the brink of the collapse of the modern markets and capitalist economy, well, that's not provably wrong... but historically the stock market had positive returns over the long run even with wild business cycles and bubbles and busts. And if you think it's all doomed, the alternative is not cash, it's speculative investments with no proven record. I - know - there will be bumps on the road, but I'd personally bet on the economy and the markets being ok in the long run - there is no way to prepare financially for a total collapse anyway.
I see nothing inherently wrong with index funds (the products). The issue I see is the size of the exit door, as Burry states: ----------------------------------- Liquidity Risk “The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic. “In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.” ----------------------------------- As can be seen in the flash crash of Dec 2018 (the market dropped 18% in less than 3 weeks because the fed raised interest rates a quarter-point). The exit door gets really really small when everyone is trying to run through it. In a normal market, purchases and redemptions are mostly balanced and index funds don't do a lot of trading. The problem with retail investors is they always run for the exits at the wrong times and try to go to cash when they shouldn't. What happens when you get a real crisis, not just a quarter point interest rate hike? Most people forget the markets simply don't just go straight up, year after year after year. FTR, I don't know what happens and fears could be overblown but the exit door size scares me. If selling takes place for months rather than weeks and retail investors get really scared and decide to move to cash all at once, I'm not sure who would step in to buy... I guess the gov't would have to, similar to Japan where they own a lot of the stock market assets.
I do not think that “everyone running for the door” is realistic. Index funds have maintained positive net inflows through past crises (2000, 2008). The scale is bigger now, but more scale does not mean more (relatively more) panic sellers. The idea that everyone will want to sell at the same time is too far fetched to be a reason to avoid index funds. Conceptually I agree with the issue. I do not think it is realistic for it to materialize. Edit: This PWL white paper addresses the issue of liquidity specifically in bond ETFs www.pwlcapital.com/wp-content/uploads/2018/06/2016-05-19_-Kerzerho_Are-Bond-ETFs-Dangerous_Hyperlinked.pdf
@@BenFelixCSI It may not be realistic, but the scale of the market (index funds) is so much bigger now so it would be my major concern. The reality is... I just don't know because we've never been here before in terms of the size of the index fund market. If one is buying and holding for the long-term, it's a moot point because we are buying companies for their earnings and long-term growth of those earnings, short-term portfolio fluctuations don't matter and as long as you aren't using leverage, there is nothing to be concerned with. The problem is the average retail investor isn't disciplined and sometimes doesn't understand what they are actually investing in; they buy and sell at the perfectly wrong time. The markets are definitely much different than they have been in the past. The gov't is aware of this, that's why you see interest rates being lowered from a historically very low level, even when the market is sitting at highs.
@@pipebliss You're assuming that 100% of retail investors are in passive index funds, which isn't even close to being true. If you want to worry about a liquidity crunch, you probably ought to worry more about retail investors in actively managed funds and retail stock pickers. Proportional to the share of the total market, those groups are much more likely to be the cause of a liquidity crunch, if one were to happen.
This is a very good argument. This exposes the subtle point made in the video: “50% of the money in markets is index but only 15% of stocks are owned by index funds” so that means index funds are effectively leveraged >3x by having a lot of capital trading in the secondary market for unit holders but far less capital trading in the primary market for the underlying stocks. So if and when an end-cycle redemption event occur, the ETF funds will struggle to fulfill the sell orders all at once- like a run on an index fund. So Burry was spot on when he described that risk, of which was very subtly glanced over in this otherwise highly informative video.
Great video as always Ben. Wanted to thank you for all the insights you've provided. Your evidence based reasoning filled the knowledge gap I had, in an accessible way, and led me to reconstruct my small private portfolio into something I can actually explain and confidently reason about. Cheers mate.
Sincerely, with the actions of central banks in all the world and all the time printing money as crazy , you come to me complaining that index funds can create noise in price discovery? Get out of here...
I am not sure about the advice to invest in small cap companies. Maybe big companies outperform small ones due to the nature of these "new" digital products. In the digital world the winner takes it all.
I appreciate your point of view however I think the point of these fears is not what is happening now but what happens in a crisis. Pointing to the limiting amount these funds effect a liquid market is like rating a movie based on its trailer. We have not seen what happens yet in a truly illiquid market with this level of funds under management. Remember that mutual funds have far more discretion in a liquidity crisis than an index fund. The fear from more astute analysts is more about how this will effect a sell off not and price increae. Very solid points on why they have limited effect on price increases thougg
Whats up Ben, Fabio here and I just found yout channel! Great Job! Already subscribed. I am a financial analyst here in Brazil and I also have a channel here about stock market and financial analysis.
@@BenFelixCSIThe millenial advocado toast extraordinarie with +1mil TH-cam subscribers, that makes you (read me) realize how financially illeterate are, so you come here for an informed, hands on explanation, from a real financial professional.As the say goes "common sense is the least common of all senses". Thanks for the good work. th-cam.com/video/fwe-PjrX23o/w-d-xo.html
Don't usually comment on TH-cam but your videos are informative, interesting and has converted me from an active portfolio investing methodology to swinging to an ETF heavy portfolio. Your videos are insightful and great learning. Keep up the good work!
Another reason to split your passive index between US S&P 500 & UK FTSE 100. If there's a bubble in index ETFs its more advanced in the US markets and the London market indexes give you equal risk /return comfort with an extra door to exit the crowded theatre if needed.
Leverage is nuts for young investors. Younger the more mistakes even if it gives better returns. Why not 100x? We can't predict future interest rates and they can jump overnight so can young/vulnerable people handle a crashed market plus double digit interest rates for leverage?
I don’t right now. I’m not opposed to leverage at all, but in my case with a 100% equity portfolio and all of my human capital directly tied to the market, I have decided not to lever up.
That would be a market timing decision. If I am going to lever, I am going to lever long-term. Just like I wouldn't be 80% equity for now, but go to 100% equity in a crash. The data on market timing suggest that I am better off maintaining my target allocation at all times. Unless of course you can perfectly time the bottom, but that's a tough one.
Thank you for clearing that up. Reading all these articles on the index bubble lately made me worry a bit but not anymore! Too bad TD doesn't offer any small cap fund in their e-Series -.-
From some years the flow of etfs has been similar to that of quantitative easing from a central bank on bonds. This means that many buy indexes as sp500s because they know that further flows will come from etfs (and buybacks) and not for fundamental reasons. In this case there is no difference between active and passive investors: both end up pushing a certain category of shares (those that are in the sp500). In the video you talk about the pricing BETWEEN the shares inside the index. The problem is, instead, in my opinion, that ALL the shares that are inside a "popular" index become too expensive because of the etf and buyback flows. This dynamic is then amplified by the active managers (and not the opposite): the final result is that you have expensive shares (and you buy it using etf) and the risk of a big bubble
What do you think about the emergency exit being too small where people trying to sell their index fund in a recession will be too crowded for people to be able to sell?
Hey Ben, only just recently found your TH-cam Channel and I wish to thank you VERY much for the excellent content you publish. I previously thought I was reasonably smart until I learned from people like Jack Bogle, and Eugene Fama, Daniel Kahneman & Amos Tversky via Richard Thaler, and more widely Nicholas Taleb and the late great Richard Feynman. I very much like your approach of directly referencing the key research papers as that significantly helps people to do their own research to change their own minds (as only they can)! Many, many thanks, cheers Stewart
Hello Ben felix. At 8:33 you said "Index fund hold large amount of securities that they lend to short sellers, key revenue for them and reason for low fees of etf". That is the main risk for me, what happens if short sellers can't pay back, in a crisis for example? It seems like having an ETF is having a share of a fund of stocks where those stocks are lent. Whereas if i buy a stock, i am the only one to have it. So in the end it seems like choosing between ETF and stocks is basically choosing between Low vol/Risk of loose everything(ETF) and High vol/at least have something(STOCK). Can you tell me what you think of that ?
I disagree that there is a risk of total loss on sec lending. The borrower is required to put up collateral of more than 100% of the value of the security. _In the United States, borrowers generally pledge cash collateral equal to 102% of the value of domestic securities and 105% of the value of non-U.S. shares._ Source: personal.vanguard.com/pdf/ISGSL.pdf
There is only way you can exploit inefficiency - buy undervalued stocks pushing price closer to fair value. Which I personally would do if I was trapped into everything bubble in USA dilemma. If something is overvalued you can't do anything to arbitrage it. Would you open short position for next 10 years waiting market to adjust? If something becomes unreasonably overvalued just becuase people buy it - it can last for decades. GameStop is example. Housing makret is example.
I mostly agree with this take too. In theory, shorts should be a way to address overpricing, but then you are in many ways just on the reverse side of a normal 'greater fool'-situation, crossing your fingers hoping others change their mind. If the market is okay with making less money in stocks (ie paying higher prices), the overall profitability of stocks will go down. There isn't really much to do about that directly. You more or less have to look for other assets (like smaller businesses, international businesses, or other investments) or be content with what the market is giving in terms of riss/reward.
The problem with this “large theater, fixed exit door” analogy is that I suspect that it isn’t an accurate representation of reality. So the idea is that index investors may panic sell en masse, which means the smaller (less liquid) stocks will be sold a lot more than normal, meaning their value would go down way below what it’s actually worth, right? I’m not an active investor, but if I were, I’d be all in on those stocks. The exit door isn’t fixed. If enough people want to get out, they’ll break through the windows, and active traders will gladly catch them when they fall - and clean them out when they’re down. And just because not a lot of people are buying those stocks now doesn’t mean that they aren’t keeping tabs.
I'm in need for some information, it appears that with something like MSCI World index etf or European STOXX 600 etf there is very little to none exposure to small cap stocks right?
Can you add to your explanation of how secondary markets operate. I had to watch the segment at 4:00 about 10x and I am still a bit confused. Your explanation of trading volume for ETFs on the primary market/underlying stocks makes sense, but I don't understand why the secondary markets alleviate all the concerns. Is there no risk to these unit holders trading amongst themselves? Perhaps not as it relates to price discovery but what about liquidity? Also, how can so much money be tied to an index but not own the underlyings? Then they must be leveraged or using instruments to tie the two together. Is there risk there? I don't know enough about the internals of the market to understand what is a simple mechanism/service versus a product with inherent risk. E.g. homeowner knows what a mortgage is, but banks created a product with risk (CDO) with the mortgage. Are these "units" the ETFs trade in anyway analogous to CDOs?
Large cap ETF are solid but the trading argument is iffy at best for ETF with high levels of subscriptions but with illiquids components. The poster child for this is junk bond ETF. I used to work for an AP and even in the best of times some underlying issues were hard to trade while the etf could trade all day on heavy volume without a glitch... this can be managed well during period of low vol but if people start selling in mass it could get really sketchy really fast. Right now all those junk bonds linked to etfs are warehoused but if redemptions rise fast the market will not be able to absorb all the selling.. it used to be that bank's MM provided liquidity for high yield bonds but not so much now, it takes too much space on their balance sheets. To me, the tail risk for these kind of products is real.
Actually this guy is wrong. He didn't get what burry said. The scenario that burry pointed out also has to do with the underlying economics of the company. In times like this u will see ppl value stocks like elephants because the fed is printing money but the assets of america are falling in value. The whole etf market is mainly looked by fund managers who derisk their investment by choosing ETF because ETF acts like a basket of company stocks and the whole idea of ETF is said to be safe just like CDOs were called at one point. Burry said that the rush to buy ETF as a safer investment is pushing prices and it is true but an equally good revenue/profit companies exist outside of america with very low valuation. So in a general perspective fund managers and investors move to emerging markets and hence they mainly invest in the ETF of emerging markets. Because the markets are undervalued outside of america. This whole ideology of not heavily investing in debt ridden america makes ETF markets scary because ppl bet on ETF looking at the economic perspective of the country.
Excellent explanation. Within any " index fund " the individual stocks are being traded independently as well as being held in " other " indexes which could be going down at the same time as another index going up with the exact same holding in both. It's the stock that matters , not the index.
94% of their trading is taking place amongst each other in the secondary market. This sounds like passive strategies are actually engaged in quite a bit of activity, but “do not affect the underlying securities” that make up the index. How is that so? Or is it just that we don’t see it? Nor does the amount of liquidity it requires to run the secondary market get factored in.
I can tell you one market where ETFs are distorting visibly: The Canadian Preferred shares market. This is visible where when interest rates go down, preferred shares not directly hurt by interest rates go down with the rest. This indicates mass buys and sells rather than individual examination...
The Fed balance sheet is the bubble. Either they are going to have to stop expanding the balance sheet in which case interest rates go up and assets go down (which is what happened in the REPO markets a few months ago before another round of QE), or they will keep expanding it in which case assets go up continuing to make distortions in the market and bigger bubbles all over the world. I don’t think they can find a happy medium. Either scenario is painful, but that’s how markets go. I think we are in a Goldilocks time right now, but it will definitely not last forever. Stock valuations are up because companies can borrow money for almost free and buy back shares which in my humble opinion artificially raises equity prices. I wish I had a crystal ball.....
I think index fund stablelize the market, owners of index don't buy and sell stocks like the casino. It's the wall street trades are causing the instability of the market.
Great video as always. Question, your argument immediately assumes that active managers don’t simply follow the index even if not buying the stock. They are judged every quarter and their incentive is to keep their job not outsmart the market, so, how can we know that blind DCA is not happening there as well?
If one of the analytical assumptions here is that in the growing Index composed market, active management by skilled professionals will balance the market and perhaps drive out the unskilled managers. This component then allegedly provides equilibrium ....which seems in conflict with prior commentary suggesting that skilled managers are an extremely rare commodity, if they even exist at all.
Maybe if you're only concerned about long-term growth and don't plan to use the money for at least 20 years. But keep in mind small cap value stocks have under-performed the market for over a decade, so holding only them is extremely risky. Having a tilt toward them is prudent, but owning them exclusively is risky.
One of the things I appreciate about your videos is first I’m pretty sure you’re going to tell me something I don’t want to hear however it will be level headed and well researched plus you are dispelling new myths. The new myth that index investing negates or distorts price discovery. Are index funds going to collapse between what Michael Burry says and ARK Invest, what’s what? What’s truth from hyperbole?
9:30 Can you please explain why to underweight large cap *growth* and overweight small cap *value* stocks? If large cap stock prices were inflated, I would understand why to prefer small cap to large cap, but why specifically large cap *growth* and small cap *value*?
Enjoyed the video Ben... Thanks! I think your analysis was spot on in this case. If Index Investing does cause the crash of all crashes as some predict, it won't be because of the index investing per say. It will be due to some crazy event causing a mass exodus from all investments. Outflows will be largest for indexes simply because that's where the most money lives. I find it funny how so many are hoping for another stock market crash of 50% or more. These folks think they'll be buying at the absolute bottom, which won't be the case for most. Many will buy the wrong stocks at 50% down seeing value only to sell in panic as it drops another 25%. Additionally, stock market crashes don't happen in bubbles. They happen due to major events, which may very well limit the ability to invest at all when stock prices are the lowest for many. Just saying be careful what you wish for folks... BTW... Really like small cap value right now, growth as well but to a lesser degree today.
Ben, I have watched this video more times than I can remember, and I have always found it quite comforting. That is until I listened to your Rational Reminder podcast episode with Michael Green. I must admit that I found it rather upsetting. In the light of his analysis, do you still believe that ETFs do NOT pose a threat to the stability of public markets?
The issue Mike describes is different from market efficiency. If Mike is right, while there may be an issue, there is not much to be done about it. However, it is not clear that Mike is right. We will be revisiting the topic in an episode with with Mike Green and one of his critics later this year. In the mean time, I suggest listening to this recent episode with Valentin Haddad, whose work Mike often cites. th-cam.com/video/glxaljVdpaA/w-d-xo.htmlsi=aKKfwNffc1gsFSrd
I didn't think of the shorting cost benefit from index funds so thanks. I have noticed some active investing out performs the market not due to skill but sheer concentrated volume in a small number of shares (eg consistent gains from a popular newsletter leads (motley fool) to more being invested instead of analysis based on business fundamentals). Seems less of a issue in index due to large/deep secondary market at this stage. Cheers for putting into a video.
I don't understand the final part about how buying low cap stocks is sensible either way. If index funds are broken, I would follow Michael Burry's advice and buy more small cap stocks. But if index funds aren't broken and I'm not a risk taker (small caps are higher risk higher return), then I would stick with market cap-weighted indexing, right?
Furthermore I don't understand at all how the decreased cost of Short selling has anything to do with increased efficiency of price discovery even if your premise was that it primarily consists of trading. And finally if the increase in index funds isn't contributing to market risk, are appropriately priced, and will officially lead to a historical return of 10% to infinity and beyond, why would you recommend individuals buy "underpriced" growth stocks? What does underpriced even mean in increasingly efficient markets?
Good explanation! What do you think of the critique that index fund growth leads to more common ownership which in turn is bad for consumers? Any papers you would recommend on that topic?
I think Burry has been smart to short index funds, regardless if his hypothesis turns out to be true or not, given that the market was due to decline anyway. I will look more into small cap and value stocks
i don't think it's possible to have an index fund bubble because index funds by definition only select and maintain legitimate company stocks based on a certain set of rules. All bubbles in the past were based on speculative, over-inflation of the price, and eventually once it gets to the price where it's too expensive for anyone else to willingly buy, everyone panics and sells. The catch is if the underlying asset is truly worthless, then the bubble will cause it to completely become worthless and never rebound (e.g. useless dot-com bubble companies, 'tronics bubble useless companies, shitty subprime mortgages). But these index funds house companies essentially too big too fail. prices could over inflate and crash down but many of these companies have so much cash on hand and will get bailouts, that you can weather such a crash and eventually the index will rise again.
CDOs and ETFs have similarities in that they are a wrapper, however CDOs wrapped bad rated debt and rebranded it, which was inherently bad. Unless ETFs get to the point of wrapping bad stocks and trading high, which is against the market tracking concept, i can't see an underlying problem that would pop the so called bubble. CDOs were effectively a upside down pyramid platform, with shoddy foundation that failed and lost confidence, the pop was inevitable. There is a small argument of liquidity, in that if EVERYONE wanted out there isn't enough buyers to cover sellers, but i still don't get the why they would want to.... It would be like a run on a bank, but for the whole market and that would be pretty much an endgame scenario!
Wait, I'm confused. Actual analysis and explanation. Where's the fear? Where's the drama?
Haha sorry. I’ll be more dramatic next time.
Ben Felix What’s with all this analysis and logic? Where are the Lamborghinis and the bikini women from the pyramid scheme?
@@BenFelixCSI oh yes tell us inflation is apocalypse and increasing wages make people sad.
@@firelordsozin3677 Andrew Tate would like to talk to you.
@@BenFelixCSIwhere are all the lies
As a finance PhD student, I don't think I can explain this issue as well as you do. I also think your explanation is better than quite a few finance professors who work in the mutual fund literature.
Cool! What specifically are you studying?
@@BenFelixCSI I am working in household finance and empirical asset pricing, so I also need some working knowledge in the mutual fund literature. I have come across a couple of working papers that try to model index bubbles, but I always find them skeptical, in the sense that they do not consider Grossman-Stiglitz paradox. (Those models usually need short-sell constraints or the limit-of-arbitrage argument to rule out active price discovery after indexing peaks, which sounds odd.)
Any way, thanks for replying. I have been following your TH-cam channel for a while. Really appreciate your clear tone on a wide range of finance topics.
Thanks. It’s great to know that you’re watching. I am working on a video concept where I will walk through the importance of theory to empirical results into context, and then empirically testing the theory. I think that most people (non academic) fundamentally misunderstand how this works in economics, which makes them more likely to dismiss foundational research like EMH as useless.
@@BenFelixCSI Looking forward to it!
3:41 - This was a real lightbulb moment for me. AUM doesn't drive pricing, trading does. How did I not see that before? It's such an obvious refutation of the Burry Bubble clickbait. Thank you for shedding light on the F, U and D surrounding this whole thing.
The risk is, that you don't own the underlying asset. The risk is there is no price discovery and the risk sits with the owners of the funds.
Your titles are perfect for attracting the viewers that actually need to see the video
@9:42 "If the market is broken..." Yes, but if passive investing has unfairly boosted the price of mega-caps then that trend may have a lot further to run. Anyone tilting to small caps is effectively short a long-term structural trend. Small caps may indeed be cheaper than they would be if passive hadn't been invented, but they can get a lot cheaper if the the migration to passive persists...
waiting for Michael J. Burry's response :D
Well, even if you assume that 2008 "Big Short" heroes like Burry are credible with future predictions, doesn't work well:)
Another "2008 Big Short hero" says opposite today.
th-cam.com/video/uQcBDFKoMIE/w-d-xo.html
He will probably say he has never heard of him. That's what Ben says when someone proves him wrong lol.
@@DaMostShadiest is there any cases where he was wrong? Can you give an examples?
@@ipohertroyanov464 you must be new here.
@@DaMostShadiest doesn't really answer the question for somebody who is actually new.
One of the most informative channels out there!
I've previously mentioned in the comments about a potential index bubble. Thank you for making a video on this, so plebs like me can be educated 😅
I wonder if there’ll be an update to this video now after that interview with mr. Green
Same! I was looking for comments on this point. Ben, please consider an update on this 🙏
Excellent analysis as usual. Most index investors are probably long term holders and will gladly buy weakness, not rush for the exit. No comparison with CDO toxic assets of 2007. Thanks for this great video Ben.
Totally agree.
Reminds me of the 2008 housing crash where all the 'experts' were swearing that the market was fine and normal..."buy now or be priced our forever" ...we shall see, but the very few will be making a killing again!
Turns out no index bubble
I see that the most important arguement in this video is that Trade volume is responsible for price discovery (not AUM) which is true. You also make the important claim that indexing makes up a relatively small amount of trading volume. All your arguments are spot on.
The only interesting im left thinking about though is that how some large cap "popular" stocks (e.g. Amazon, Google, etc) could have their prices distorted not only from the ~5% of trading done by passive index funds, but also the mountains of actively managed mutual funds sold by financial advisors all over North America. I would bet that would make up quite a bit more trading and therefore have quite the effect on pricing (maybe distortions) because certain stocks are owned by such a crazy large amount of mutual funds.
Great video as always! The bubble claim was obviously dubious (per definition, it would have been the underlying stocks that were bubbled - comparing index funds to subprimes was ludicrous), but that index funds could introduce a (temporary) distortion sounded more credible. You brought an important perspective by analyzing the trades and not only the assets under management.
@Luís Andrade I never said stocks couldn't be bubbled (or at least overvalued): what I said is that if (broad, diversified) index ETFs are indeed bubbled, ipso facto stocks in general are bubbled (because there is no reliable way to tell which are trading at fair value if the markets are "efficient enough"). It's somewhat ironic when people both freak out by "money printing" and increased valuation of assets... where do you think all that increased liquidity goes if inflation remains low and consumption/production doesn't scale up proportionally? There is no way to tell whether or not asset valuation are "too high" or "too low" at any given moment before the fact and if someone thinks we're on the brink of the collapse of the modern markets and capitalist economy, well, that's not provably wrong... but historically the stock market had positive returns over the long run even with wild business cycles and bubbles and busts. And if you think it's all doomed, the alternative is not cash, it's speculative investments with no proven record. I - know - there will be bumps on the road, but I'd personally bet on the economy and the markets being ok in the long run - there is no way to prepare financially for a total collapse anyway.
@@fredericbrown8871 well said! Very well done!
I see nothing inherently wrong with index funds (the products). The issue I see is the size of the exit door, as Burry states:
-----------------------------------
Liquidity Risk
“The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic.
“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”
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As can be seen in the flash crash of Dec 2018 (the market dropped 18% in less than 3 weeks because the fed raised interest rates a quarter-point). The exit door gets really really small when everyone is trying to run through it. In a normal market, purchases and redemptions are mostly balanced and index funds don't do a lot of trading. The problem with retail investors is they always run for the exits at the wrong times and try to go to cash when they shouldn't.
What happens when you get a real crisis, not just a quarter point interest rate hike?
Most people forget the markets simply don't just go straight up, year after year after year.
FTR, I don't know what happens and fears could be overblown but the exit door size scares me. If selling takes place for months rather than weeks and retail investors get really scared and decide to move to cash all at once, I'm not sure who would step in to buy... I guess the gov't would have to, similar to Japan where they own a lot of the stock market assets.
I do not think that “everyone running for the door” is realistic. Index funds have maintained positive net inflows through past crises (2000, 2008). The scale is bigger now, but more scale does not mean more (relatively more) panic sellers. The idea that everyone will want to sell at the same time is too far fetched to be a reason to avoid index funds. Conceptually I agree with the issue. I do not think it is realistic for it to materialize.
Edit: This PWL white paper addresses the issue of liquidity specifically in bond ETFs www.pwlcapital.com/wp-content/uploads/2018/06/2016-05-19_-Kerzerho_Are-Bond-ETFs-Dangerous_Hyperlinked.pdf
@@BenFelixCSI It may not be realistic, but the scale of the market (index funds) is so much bigger now so it would be my major concern. The reality is... I just don't know because we've never been here before in terms of the size of the index fund market.
If one is buying and holding for the long-term, it's a moot point because we are buying companies for their earnings and long-term growth of those earnings, short-term portfolio fluctuations don't matter and as long as you aren't using leverage, there is nothing to be concerned with.
The problem is the average retail investor isn't disciplined and sometimes doesn't understand what they are actually investing in; they buy and sell at the perfectly wrong time.
The markets are definitely much different than they have been in the past. The gov't is aware of this, that's why you see interest rates being lowered from a historically very low level, even when the market is sitting at highs.
Liquidity and the exit door.
@@pipebliss You're assuming that 100% of retail investors are in passive index funds, which isn't even close to being true. If you want to worry about a liquidity crunch, you probably ought to worry more about retail investors in actively managed funds and retail stock pickers. Proportional to the share of the total market, those groups are much more likely to be the cause of a liquidity crunch, if one were to happen.
This is a very good argument. This exposes the subtle point made in the video: “50% of the money in markets is index but only 15% of stocks are owned by index funds” so that means index funds are effectively leveraged >3x by having a lot of capital trading in the secondary market for unit holders but far less capital trading in the primary market for the underlying stocks. So if and when an end-cycle redemption event occur, the ETF funds will struggle to fulfill the sell orders all at once- like a run on an index fund. So Burry was spot on when he described that risk, of which was very subtly glanced over in this otherwise highly informative video.
Great video as always Ben. Wanted to thank you for all the insights you've provided. Your evidence based reasoning filled the knowledge gap I had, in an accessible way, and led me to reconstruct my small private portfolio into something I can actually explain and confidently reason about. Cheers mate.
Love that channel too!
Haven't clicked a video this fast in awhile. Spot on with this analysis Ben!
ayy youve come a long way bro!
Incredibly informative and backed by research!
Update: Small cap value spent the next five years eating dirt. Large cap growth continued to be a major winner.
🧐 AVUV launched around the same time as this video and has beaten SPY since inception.
SPYG comes out a bit ahead of AVUV, but not by much.
Sincerely, with the actions of central banks in all the world and all the time printing money as crazy , you come to me complaining that index funds can create noise in price discovery? Get out of here...
I am not sure about the advice to invest in small cap companies. Maybe big companies outperform small ones due to the nature of these "new" digital products. In the digital world the winner takes it all.
Canal do Holder brought me here. Great video man! Subscribed already.
Thank you!
I appreciate your point of view however I think the point of these fears is not what is happening now but what happens in a crisis.
Pointing to the limiting amount these funds effect a liquid market is like rating a movie based on its trailer. We have not seen what happens yet in a truly illiquid market with this level of funds under management.
Remember that mutual funds have far more discretion in a liquidity crisis than an index fund. The fear from more astute analysts is more about how this will effect a sell off not and price increae.
Very solid points on why they have limited effect on price increases thougg
Here’s some recommended reading www.pwlcapital.com/wp-content/uploads/2018/06/2016-05-19_-Kerzerho_Are-Bond-ETFs-Dangerous_Hyperlinked.pdf
Whats up Ben, Fabio here and I just found yout channel! Great Job! Already subscribed. I am a financial analyst here in Brazil and I also have a channel here about stock market and financial analysis.
Canal do Holder TMJ👊🏽
Hey Fabio, thanks for stopping by! I am unfortunately language constrained to English, but it looks like you're doing a great job on your channel!
Coming from Holder's channel. Subscribed
@@BenFelixCSI No problem! :) Great to connect!
the best finance channel in brazil
Hey Ben, thanks for helping out! Came here from Fabio Holder's TH-cam account. Keep it up!
Thank you!
Funny...I did post the question to Graham about his thoughts on Dr Burry's Index funds bubble claims... Felix, you are one step ahead. Subscribed..
Who’s Graham? Welcome to the channel!
@@BenFelixCSIThe millenial advocado toast extraordinarie with +1mil TH-cam subscribers, that makes you (read me) realize how financially illeterate are, so you come here for an informed, hands on explanation, from a real financial professional.As the say goes "common sense is the least common of all senses". Thanks for the good work.
th-cam.com/video/fwe-PjrX23o/w-d-xo.html
Weird how the people who complain the most about an 'index bubble' are the ones who should stand to benefit the most from that bubble.
Don't usually comment on TH-cam but your videos are informative, interesting and has converted me from an active portfolio investing methodology to swinging to an ETF heavy portfolio. Your videos are insightful and great learning. Keep up the good work!
Another reason to split your passive index between US S&P 500 & UK FTSE 100.
If there's a bubble in index ETFs its more advanced in the US markets and the London market indexes give you equal risk /return comfort with an extra door to exit the crowded theatre if needed.
Still waiting for the leveraged ETF video! According to studies 2x Leveraged might be the best option for young investors.
I use x2 and the returns are excellent. One advantage of negative interest rates is lower cost of leverage😄👍also an advantage for trusts 😀😃
Leverage is nuts for young investors. Younger the more mistakes even if it gives better returns. Why not 100x? We can't predict future interest rates and they can jump overnight so can young/vulnerable people handle a crashed market plus double digit interest rates for leverage?
@@Nuganics Yes they can. Read the studies, we are talking about 2x leveraged.
I'm interested in Ben's response to this
I once heard an economist say that you do get higher returns, but it's not on the efficient frontier. The risk increases more than the returns
Ben, do you leverage your investments using margin?
I don’t right now. I’m not opposed to leverage at all, but in my case with a 100% equity portfolio and all of my human capital directly tied to the market, I have decided not to lever up.
Ben Felix maybe in a market crash it could be worth it!
That would be a market timing decision. If I am going to lever, I am going to lever long-term. Just like I wouldn't be 80% equity for now, but go to 100% equity in a crash. The data on market timing suggest that I am better off maintaining my target allocation at all times. Unless of course you can perfectly time the bottom, but that's a tough one.
If youtubers were stocks then i would go long on you
SUS
They really should be..... you tubers should have derivative clearing house where ppl can bet on their success.
I’d be long too
Gay
I learned more about investing from this channel than any book or course.
You've read all the books? Impressive!!!
Thank you for clearing that up. Reading all these articles on the index bubble lately made me worry a bit but not anymore! Too bad TD doesn't offer any small cap fund in their e-Series -.-
Agreed but their fund fees are so reasonable for the Canadian market. I love their e-Series US Index fund.
5:50 - Speaking of active manager, I think on was trying to say something before the jump cut.
Thumbs up if you want Ben to debate this topic with Steven Bregman on the RR podcast!
You’re my hero! Thanks for cutting through the noise
Index Funds + Bitcoin + Sovereign Bonds + Corporate Bonds + Private Equity + Stocks + Real Estate = *EVERYTHING BUBBLE*
I have 17k in 403b I'm only 26. Should I just liquidate and hold cash until this boils over???
@@VaticusChadicus No because there will always be something else to worry about
From some years the flow of etfs has been similar to that of quantitative easing from a central bank on bonds. This means that many buy indexes as sp500s because they know that further flows will come from etfs (and buybacks) and not for fundamental reasons.
In this case there is no difference between active and passive investors: both end up pushing a certain category of shares (those that are in the sp500).
In the video you talk about the pricing BETWEEN the shares inside the index. The problem is, instead, in my opinion, that ALL the shares that are inside a "popular" index become too expensive because of the etf and buyback flows.
This dynamic is then amplified by the active managers (and not the opposite): the final result is that you have expensive shares (and you buy it using etf) and the risk of a big bubble
I keep coming back to this video. Such good information and reminder
What do you think about the emergency exit being too small where people trying to sell their index fund in a recession will be too crowded for people to be able to sell?
So... the secondary markets are obscuring actual trade volumes, interesting.
Is there any evidence to support that small cap stocks outperform large cap when accounting for survivorship bias and adjusting for risk?
Small Cap and Value Stocks
th-cam.com/video/2MVSsVi1_e4/w-d-xo.html
Wow, such an awesome quality content. TH-cam is really getting good. Thanks Ben!
Hey Ben, only just recently found your TH-cam Channel and I wish to thank you VERY much for the excellent content you publish. I previously thought I was reasonably smart until I learned from people like Jack Bogle, and Eugene Fama, Daniel Kahneman & Amos Tversky via Richard Thaler, and more widely Nicholas Taleb and the late great Richard Feynman. I very much like your approach of directly referencing the key research papers as that significantly helps people to do their own research to change their own minds (as only they can)! Many, many thanks, cheers Stewart
Class in session early on a Saturday.
This is so brilliantly explained. Thanks Ben.
"The market is like a large movie theater with a small door." Nassim Nicholas Taleb
Was just listening to the episode with Pastor, and this Glassman-Stiglitz paradox is absolutely fascinating.
Hello Ben felix. At 8:33 you said "Index fund hold large amount of securities that they lend to short sellers, key revenue for them and reason for low fees of etf". That is the main risk for me, what happens if short sellers can't pay back, in a crisis for example? It seems like having an ETF is having a share of a fund of stocks where those stocks are lent. Whereas if i buy a stock, i am the only one to have it. So in the end it seems like choosing between ETF and stocks is basically choosing between Low vol/Risk of loose everything(ETF) and High vol/at least have something(STOCK). Can you tell me what you think of that ?
I disagree that there is a risk of total loss on sec lending. The borrower is required to put up collateral of more than 100% of the value of the security.
_In the United States, borrowers generally pledge cash collateral equal to 102% of the value of domestic securities and 105% of the value of non-U.S. shares._
Source: personal.vanguard.com/pdf/ISGSL.pdf
There is only way you can exploit inefficiency - buy undervalued stocks pushing price closer to fair value. Which I personally would do if I was trapped into everything bubble in USA dilemma.
If something is overvalued you can't do anything to arbitrage it. Would you open short position for next 10 years waiting market to adjust?
If something becomes unreasonably overvalued just becuase people buy it - it can last for decades. GameStop is example.
Housing makret is example.
I mostly agree with this take too. In theory, shorts should be a way to address overpricing, but then you are in many ways just on the reverse side of a normal 'greater fool'-situation, crossing your fingers hoping others change their mind.
If the market is okay with making less money in stocks (ie paying higher prices), the overall profitability of stocks will go down. There isn't really much to do about that directly. You more or less have to look for other assets (like smaller businesses, international businesses, or other investments) or be content with what the market is giving in terms of riss/reward.
The problem with this “large theater, fixed exit door” analogy is that I suspect that it isn’t an accurate representation of reality.
So the idea is that index investors may panic sell en masse, which means the smaller (less liquid) stocks will be sold a lot more than normal, meaning their value would go down way below what it’s actually worth, right? I’m not an active investor, but if I were, I’d be all in on those stocks.
The exit door isn’t fixed. If enough people want to get out, they’ll break through the windows, and active traders will gladly catch them when they fall - and clean them out when they’re down. And just because not a lot of people are buying those stocks now doesn’t mean that they aren’t keeping tabs.
I'm in need for some information, it appears that with something like MSCI World index etf or European STOXX 600 etf there is very little to none exposure to small cap stocks right?
Thanks. That’s just before Covid. Imagine what roller coaster ride awaited…
Can you add to your explanation of how secondary markets operate. I had to watch the segment at 4:00 about 10x and I am still a bit confused. Your explanation of trading volume for ETFs on the primary market/underlying stocks makes sense, but I don't understand why the secondary markets alleviate all the concerns. Is there no risk to these unit holders trading amongst themselves? Perhaps not as it relates to price discovery but what about liquidity? Also, how can so much money be tied to an index but not own the underlyings? Then they must be leveraged or using instruments to tie the two together. Is there risk there? I don't know enough about the internals of the market to understand what is a simple mechanism/service versus a product with inherent risk. E.g. homeowner knows what a mortgage is, but banks created a product with risk (CDO) with the mortgage. Are these "units" the ETFs trade in anyway analogous to CDOs?
Large cap ETF are solid but the trading argument is iffy at best for ETF with high levels of subscriptions but with illiquids components. The poster child for this is junk bond ETF. I used to work for an AP and even in the best of times some underlying issues were hard to trade while the etf could trade all day on heavy volume without a glitch... this can be managed well during period of low vol but if people start selling in mass it could get really sketchy really fast. Right now all those junk bonds linked to etfs are warehoused but if redemptions rise fast the market will not be able to absorb all the selling.. it used to be that bank's MM provided liquidity for high yield bonds but not so much now, it takes too much space on their balance sheets. To me, the tail risk for these kind of products is real.
Still not clear how the price is matching the index
Idea:
As Usa index have higher pe ratios, it may be better to tilt portfolio towards more small value stocks rather than large growth stocks.
How much % you consider a ''enough'' tilt
What do we do if the distortion only goes up and active investor can't profit from any drop? we only going up then?
Actually this guy is wrong.
He didn't get what burry said.
The scenario that burry pointed out also has to do with the underlying economics of the company.
In times like this u will see ppl value stocks like elephants because the fed is printing money but the assets of america are falling in value.
The whole etf market is mainly looked by fund managers who derisk their investment by choosing ETF because ETF acts like a basket of company stocks and the whole idea of ETF is said to be safe just like CDOs were called at one point.
Burry said that the rush to buy ETF as a safer investment is pushing prices and it is true but an equally good revenue/profit companies exist outside of america with very low valuation.
So in a general perspective fund managers and investors move to emerging markets and hence they mainly invest in the ETF of emerging markets.
Because the markets are undervalued outside of america.
This whole ideology of not heavily investing in debt ridden america makes ETF markets scary because ppl bet on ETF looking at the economic perspective of the country.
Excellent explanation. Within any " index fund " the individual stocks are being traded independently as well as being held in " other " indexes which could be going down at the same time as another index going up with the exact same holding in both. It's the stock that matters , not the index.
Great video. Interesting to know that index funds represent only 5% of the market transactions.
94% of their trading is taking place amongst each other in the secondary market. This sounds like passive strategies are actually engaged in quite a bit of activity, but “do not affect the underlying securities” that make up the index. How is that so? Or is it just that we don’t see it? Nor does the amount of liquidity it requires to run the secondary market get factored in.
I can tell you one market where ETFs are distorting visibly: The Canadian Preferred shares market. This is visible where when interest rates go down, preferred shares not directly hurt by interest rates go down with the rest. This indicates mass buys and sells rather than individual examination...
Wait i'm confused. All the funds follow indexes and they all find bids on secondary market slightly affecting real trades on shares. Confusing
The Fed balance sheet is the bubble. Either they are going to have to stop expanding the balance sheet in which case interest rates go up and assets go down (which is what happened in the REPO markets a few months ago before another round of QE), or they will keep expanding it in which case assets go up continuing to make distortions in the market and bigger bubbles all over the world. I don’t think they can find a happy medium. Either scenario is painful, but that’s how markets go. I think we are in a Goldilocks time right now, but it will definitely not last forever. Stock valuations are up because companies can borrow money for almost free and buy back shares which in my humble opinion artificially raises equity prices.
I wish I had a crystal ball.....
I think index fund stablelize the market, owners of index don't buy and sell stocks like the casino. It's the wall street trades are causing the instability of the market.
Great video as always. Question, your argument immediately assumes that active managers don’t simply follow the index even if not buying the stock. They are judged every quarter and their incentive is to keep their job not outsmart the market, so, how can we know that blind DCA is not happening there as well?
I agree on overweighting small cap value. 40% of my Roth IRA is in slyv
@Abitamim Bharmal Look at November buddy. Up 19.15%
@Abitamim Bharmal I mean you commented on it! I guess I should just ignore your comment then.
@Abitamim Bharmal how do you know that my investment made no sense? What if it destroys every asset class in the future?
If one of the analytical assumptions here is that in the growing Index composed market, active management by skilled professionals will balance the market and perhaps drive out the unskilled managers. This component then allegedly provides equilibrium ....which seems in conflict with prior commentary suggesting that skilled managers are an extremely rare commodity, if they even exist at all.
Does it make sense to only hold small cap value and value etfs and no exposure to large growth etf?
Maybe if you're only concerned about long-term growth and don't plan to use the money for at least 20 years. But keep in mind small cap value stocks have under-performed the market for over a decade, so holding only them is extremely risky. Having a tilt toward them is prudent, but owning them exclusively is risky.
One of the things I appreciate about your videos is first I’m pretty sure you’re going to tell me something I don’t want to hear however it will be level headed and well researched plus you are dispelling new myths. The new myth that index investing negates or distorts price discovery.
Are index funds going to collapse between what Michael Burry says and ARK Invest, what’s what? What’s truth from hyperbole?
Really thorough discussion of a clearly quite complex issue
9:30 Can you please explain why to underweight large cap *growth* and overweight small cap *value* stocks? If large cap stock prices were inflated, I would understand why to prefer small cap to large cap, but why specifically large cap *growth* and small cap *value*?
Enjoyed the video Ben... Thanks! I think your analysis was spot on in this case. If Index Investing does cause the crash of all crashes as some predict, it won't be because of the index investing per say. It will be due to some crazy event causing a mass exodus from all investments. Outflows will be largest for indexes simply because that's where the most money lives.
I find it funny how so many are hoping for another stock market crash of 50% or more. These folks think they'll be buying at the absolute bottom, which won't be the case for most. Many will buy the wrong stocks at 50% down seeing value only to sell in panic as it drops another 25%. Additionally, stock market crashes don't happen in bubbles. They happen due to major events, which may very well limit the ability to invest at all when stock prices are the lowest for many. Just saying be careful what you wish for folks...
BTW... Really like small cap value right now, growth as well but to a lesser degree today.
What are some good performing Nanocap stock's?
Brilliant. Excellent breakdown and explanation.
Although... Would be interested in an update post-pandemic...
Can you please debate Mike Green on this.
Are there any small-cap leaning index funds?
I asked ChatGPT and it said yes.
Ben, I have watched this video more times than I can remember, and I have always found it quite comforting. That is until I listened to your Rational Reminder podcast episode with Michael Green. I must admit that I found it rather upsetting. In the light of his analysis, do you still believe that ETFs do NOT pose a threat to the stability of public markets?
The issue Mike describes is different from market efficiency. If Mike is right, while there may be an issue, there is not much to be done about it. However, it is not clear that Mike is right.
We will be revisiting the topic in an episode with with Mike Green and one of his critics later this year.
In the mean time, I suggest listening to this recent episode with Valentin Haddad, whose work Mike often cites. th-cam.com/video/glxaljVdpaA/w-d-xo.htmlsi=aKKfwNffc1gsFSrd
Thanks Ben. I’ll listen to that episode.
I didn't think of the shorting cost benefit from index funds so thanks. I have noticed some active investing out performs the market not due to skill but sheer concentrated volume in a small number of shares (eg consistent gains from a popular newsletter leads (motley fool) to more being invested instead of analysis based on business fundamentals). Seems less of a issue in index due to large/deep secondary market at this stage. Cheers for putting into a video.
I don't understand the final part about how buying low cap stocks is sensible either way.
If index funds are broken, I would follow Michael Burry's advice and buy more small cap stocks.
But if index funds aren't broken and I'm not a risk taker (small caps are higher risk higher return), then I would stick with market cap-weighted indexing, right?
Furthermore I don't understand at all how the decreased cost of Short selling has anything to do with increased efficiency of price discovery even if your premise was that it primarily consists of trading. And finally if the increase in index funds isn't contributing to market risk, are appropriately priced, and will officially lead to a historical return of 10% to infinity and beyond, why would you recommend individuals buy "underpriced" growth stocks? What does underpriced even mean in increasingly efficient markets?
Great video. I think the Stiglitz paper should lay waste to the worries about index funds ruining the market.
Christian Libertarian
Let’s wait for the next time we get a true bear market. Then, whoever survives that can tell us how they did so.
How would I go about overweighting small-cap value stocks?
This man knows what he is talking. Well done, sir.
Great content! I learned a lot thanks to this video, so thank you! ✨
Dividend investing is the best way to inve......
whoops wrong video.
This Saturday has been way too relaxing for me. I need to release more controversial videos.
Like the gold dragon!
It's nice to see this channel growing.
How do you create the animations?
But why would I want market price discovery to be more efficient? Doesn't that just make it harder to take advantage of the inefficiencies....
Always excellent information...thanks Ben!
Good explanation! What do you think of the critique that index fund growth leads to more common ownership which in turn is bad for consumers? Any papers you would recommend on that topic?
So if I got it right ETFs trades are 5% of all trades and only 5% of those are trading the underlying assets so the real number here is 5% of 5%?
Where is the actual interview?
I think Burry has been smart to short index funds, regardless if his hypothesis turns out to be true or not, given that the market was due to decline anyway.
I will look more into small cap and value stocks
i don't think it's possible to have an index fund bubble because index funds by definition only select and maintain legitimate company stocks based on a certain set of rules. All bubbles in the past were based on speculative, over-inflation of the price, and eventually once it gets to the price where it's too expensive for anyone else to willingly buy, everyone panics and sells. The catch is if the underlying asset is truly worthless, then the bubble will cause it to completely become worthless and never rebound (e.g. useless dot-com bubble companies, 'tronics bubble useless companies, shitty subprime mortgages). But these index funds house companies essentially too big too fail. prices could over inflate and crash down but many of these companies have so much cash on hand and will get bailouts, that you can weather such a crash and eventually the index will rise again.
CDOs and ETFs have similarities in that they are a wrapper, however CDOs wrapped bad rated debt and rebranded it, which was inherently bad. Unless ETFs get to the point of wrapping bad stocks and trading high, which is against the market tracking concept, i can't see an underlying problem that would pop the so called bubble.
CDOs were effectively a upside down pyramid platform, with shoddy foundation that failed and lost confidence, the pop was inevitable.
There is a small argument of liquidity, in that if EVERYONE wanted out there isn't enough buyers to cover sellers, but i still don't get the why they would want to.... It would be like a run on a bank, but for the whole market and that would be pretty much an endgame scenario!
I have heard that mid cap value has historically outperformed both small and large cap stocks. Have you done any research on midcap stocks?
I have Mr money mustache and now you to thank for better understanding this debate.