A contrarian perspective on index funds.

Read the Story

Show Top Comments

Burry tried to say this too. Neither of them really understand just how little indexing actual affects price discovery. Dude, hedge fund algorithms are enacting trades by the literal nanosecond. Price discovery in the underlying assets of these indexes is more alive and well than ever. Not “mostly everybody” is buying the index, and even if they did, then more people would invest actively because it would be easier to beat the market. It’s a self correcting problem even if it did exist.


this was not a unique perpective in the years leading up to covid crash. but keep in mind that active fund managers were losing millions in commisions with the rise of low cost index funds so my guess is this was their attempt to muddy the waters. with rise of retail trading post covid, stock picking is back in fashion so I would say this is less of an issue now regardless of the merits of the argument.


what are you suggesting? One buys a subset of the index and convinces themselves they are somehow more diversified? thats just stock picking.


this is tangential, but there was a thread a while back where the topic was the relationship between indexing and loss of market efficiency / price discovery. the most parroted counterpoint was that, as more and more people index, there becomes more alpha available for active managers, because the “fuck it, buy the whole index” activity of passive investors caused the market to be less efficient and therefore active managers could find alpha. this led to the conclusion that any market inefficiency would be self-correcting, since it would be traded away. **however**, someone countered this with a paper which actually showed (or claimed, rather) that as more people indexed passively, there was actually less alpha available. as more people did the same shit at the same time, either buying or selling, active funds had a harder and harder time beating the market. I would be interested to see this paper if anyone knows where it is. it seemed like a pretty strong counter to the typical “well if everyone indexes then managers can find alpha and it will get traded away” argument


This is particularly a problem where the ETF has a lot of liquidity and FUM compared to the individual stocks it holds. See the ARK ETFs and ArkG especially. The mass buying and selling of the Ark ETF can end up pushing the underlying stocks higher or lower and you end up with a tail wagging the dog situation.