I think Ben Felix's video "The Index Fund Bubble" does a much better job at explaining why there is no Index Fund bubble, TLDW: 1- stock prices are set by trading, NOT by assets under management 2- index funds DO make a large portion of the FUND market and their share has increased, but they own a small portion of the stock market itself, only 7.4% of the global stock market is owned by index funds 3- index funds make up a small portion of actual trading, index fund strategies are responsible for only 5% of trading 4- even if price distortions did occur because of passive investing, that would be a chance for active managers to profit off of this and to correct the market 5- the growth of index funds drives out bad active managers and decreases the cost of short selling which leads to a more efficient market 6- even if all of this is wrong and your hypothesis is true, the solution for investors would be to avoid large cap index funds and invest in small cap index funds (Good portfolios should be diversified anyways)
It is actually a paradox. 1. Active management tends to underperform due to transaction fees and efficient market hypothesis. 2. Hence, most people rush towards passive management, fuelling the bubble. 3. If the majority is wrong (passive), active management has to outperform then. 3 conflicts with 1. To be honest, investing is purely demand and supply as returns are based on future expectations. The company just sits there doing business and investors trade among other participants. Hard to say.
not a single active management LONG TERM overperformer would parade publicly their results, since the only way to do so is some 'secret' (relying on insider info, front-running trades etc). Once the secret is exposed- advantage is gone. It's either regulators are jumping on you to investigate violations or competitors copy and eat part of your lunch. Capish?
Active and passive investing are the same category of products directed to plebs. This crowd of people acts as liquidity for other players in a market. Market is designed to suck money from people in short term, it is designed to rob off traders who try to trade it conventional way and it is vividly visible in unregulated market of crypto which is purely algo market. We're due to interesting period when active/passive 'investors' won't be so happy with their blindly bought 'investment' via passive investments or bank investing products.
There are indexes other than SP500 and Nasdaq. There are companies outside of US too. Even if the entire market is made up only of passive investors, there are still gonna be different allocations in terms of investing method (weighted vs equal), asset class, geographical regions and sectors. If the market is truly artificially propped up by an index fund bubble then why are companies like Google, Facebook, Netflix, Alibaba, etc still experiencing crashes after their earnings call recently? Shouldn't they just be all bought up by index fund holders?
Hope im not too late, but the way i visualize it is this. Index increase the volatility of the underlying stock because they are market cap weighted. So its not that index fuel the bubble and inflate prices, but it exagerates any market events. For example intrinsic price goes up 1%, market sentiment improves and index money makes it go up 1.5% instead, and vice versa. If good news, price goes up, market cap goes up, index buys more, price go higher, market cap goes up and so on so forth
I am always thinking about what will cause the next financial crisis/ global recession. It isn't nice to think about but we are in a bubble of some form. QE and low interest rates have led to inflation in various markets. At some point it will have to burst right? Maybe index funds are one facet of this problem. Unfortunately we won't find out until it is too late.
Were index funds the problem in previous bubbles? No , so why would they be now? Index funds do nothing but provide liquidity. Lets think here guys. When the price of a stock is way above what it earns, reality will catch up. When growth slows in overvalued companies wall st gets real harsh. Asset prices have been propped up due to the low rates, leaving more people to run over to stocks.
@@thegreat9481 the amount of money flowing in index funds in the last decade is enormous. That's the problem. In the past as amount of money managed by index funds was basically nothing.
Index Funds like S&P500, crypto will be "interesting", a lot of overvalued tech companies (we didn't learn enough with the dot bubble), but I really think the end is near, and the cause of the collapse will be Evergrand et al.
I dont think you mentioned how the S&P is designed to keep the top companies meaning if some start performing really bad, they replace it with something else. Its designed to keep going up.
Yeah, but with a bunch of capital constantly flowing into index funds, a lot of borderline companies are kept in for longer than they should be just due to passive investors.
@@LogicallyAnswered Okay but then on the other hand how do you constantly pick the winner companies? How do you choose those companies which would stick for much longer and give constant returns? There is no formula. That's why IMO it's just best to DCA into a low-cost index fund over time and take the market returns.
An index cannot be in a “bubble” , the companies within it can be overpriced. A company being overpriced is based on what it earns. Indexing is a simple style of investing. Focus on what’s happening on a company level. There are numerous periods where valuations are high and when they are low. This idea that indexing is a “bubble” just doesn’t make sense because youre implying just because people index, valuations are gonna remain sky high. Not true. Look at what happened to Netflix and Paypal for example, they’re trading substantially lower because fundamentals are catching up. What does indexing have to do with this? Nothing. You cannot buy if a seller doesn’t exist. The market has tons of liquidity and not everyone has the same objective. Indexing is meant for long term so how the heck are they responsible for short term trends? If anything indexers are providing liquidity on autopilot, its not a one sided transaction.
In my opinion it does make sense. Stocks that belong to companies that are part of indexes tend to be overvalued, since indexes expose this stocks to a greater number of people through the hyped indexes. Example, Ive never have heard of a company called Cummins Inc. nevertheless I put money on in through the SP500.
@@clarazegarelli5861 You got to take into account the market environment. It’s virtually no where to go right now, bonds stink and rates are low so naturally people are going to be inclined to stocks. Due to rates being low people are also buying real estate more than usual and bringing up the price on homes (but thats another discussion) This is why I stress looking at the individual company level first because that only makes sense as that is what an index is made up of. There’s cheap companies within indexes still. When you focus on the company level it eliminates the confusion. You can then see how a lot of companies are trading at levels that don’t even match their growth rate and when reality hits you’ll see massive drops like we have. Fundamentals will always rule
@@thegreat9481 yep you are right. It is hard to make money (actually just not to loose against inflation). and also stock picking even if you read the 10K or deep analysis of the company product, finances etc. is not guaranteed. If Michael Burry can pick companies like Tailored Brands that when bankruptcy what is left for me.
@@123gostly sure but the point was not about the risk of my money allocation. but actually how and why money is allocated to a company that might not deserved, for sure I haven't done any due diligence on the finances of Cummins, would have never been under my radar
And this is another difference I see with people that go for index funds: a willingness to entertain the thought that they might be wrong and the potential merit of other approaches. A nice change from the overconfidence you see so much in finance circles.
While I believe that s&p 500 index fund is in a bubble, it will take a long time to burst probably in 20-30yrs. In other words you are better off investing s&p 500 index fund rather than sitting on the sideline. In addition, we are in a everything bubble so...
Well. If everyone keeps investing in s&p500 from pension funds to retail investors. It won't collapse. Since they will also keep buying the dip. "because historically it returned 10% blah blah"
@@abumetrics Jesus christ dude. When investors get concerned about what ever is going on in the world or earnings disappointment, stocks will fall. Indexes are not preventing that.
In India we have nifty 50 index fund it's a basket of top 50 Indian companies . I think having 500 companies in a fund makes more than 60% stocks useless.
Respect for taking an alternative take. I for sure agree that indices must be a part of everyones portfolios, but as some other commenters suggested, don't limit yourself to one geography and it's associated risks. The German DAX is is a great investing tool as well, and I've seen some straight up crypto-esque gains with emerging market indices.
“Top 20 or 30 tech companies and some Bitcoin” - how to lose all your credibility established over a 12min video in ten seconds. This is the dumbest thing I’ve ever heard
Thats the fun part, each of my investments gets followed by ETFs which must follow my moves. Therefore I have a small pricing leverage. The prices literally must go up, at least until we start selling, then the selling gets even worse. Therefore ETFs increase the volatility.
I totally agree with the "not enough history". If you take it to any other area of study, science will tell you that the data we have from the stock market is not enough to be so deterministic as some gurus indicate. And just want to add that a few years ago, the way you bought and sold stocks was through brokers (physically calling them on the phones) they will put data on their terminals, or make calls themself. So the actual environment is totally new, we are in uncharted terrain, past performance has little relevance.
In 2018, right before they started to talk about the 'index bubble', active trades were dwarfing index funds manager's trades and I'm pretty sure it's still the case today. It's those trades that drives the price, not the assets under management. Price discovery still works the same way it did before indexing became mainstream. Just look at the current market correction, or at how volatility doesn't seem any lower in the last decade even if index funds have had trillions in assets under management, or how market crashed so hard in March 2020 it triggered the most massive intervention of the Fed ever and it's obvious it is active participants that are driving the prices while passive investments are... well, passive. I think the cashflow directed to an asset class puts upward pressure and that there had been a lot of inflow to stocks. However, if the same amount of money had been invested in the market without any index funds, we'd have ended up with pretty much the same valuation today because mathematically it's the active investors as an aggregate that indirectly influence the indexes, not the other way around!
I think this is pretty much the key point he is missing. Price discovery still works primarily through active investments into stocks - hence the volatility right now. I wonder whether stocks have an upwards push every 1st and 15th of a month - typical dates for passive investments into ETFs. Is there data on this? One would expect this to be something you can see in the data, right?
@@strm5622 As far as I know, any obvious cyclical pattern arbitraged away before long (based on what I've heard from Patrick Boyle), so sorry, apparently no easy gain to be made on dumb passive money :)
@@fredericbrown8871 :) ah interesting. I am way too lazy to take advantage of any inefficiencies anyways. Passive investing is the only way for a lazy person like me :) so I'm just hoping my bubble doesn't burst :D Also, there is this interesting video by Ben Felix adressing some of the points regarding the "Index Fund Bubble"-idea: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-Wv0pJh8mFk0.html
@@strm5622 In truth, my arguments were mainly based on the references cited by Ben in that video, I'm a huge fan and always liked how good he was at explaining stuff and is always backing up whatever he says by research. Passive investing is the way to go for me as well, whatever happens in the market it makes it so easy to stay calm and carry on. And I like that you can indeed be "lazy" (as long as you're disciplined) and more or less reliably have a great outcome for your level of risk by just setting and forgetting. To spice things up I keep an eyes on tax loss harvesting opportunities, optimizing US Equity by holding USD ETFs in my RRSP and stuff like that, but we're talking about not that much bps for comparatively a lot of extra work and if I was tired of doing it I could just never look at my investments and it will still be fine.
Logically Answered: Index funds are a bubble Me: Panic Logically Answered: Talks only about US companies Me: Phew, good thing I invest most of my money outside the US
Index funds are complex and I’m not sure what to say about these things because of my confusion but I’m ready to understand them. Great video 👍🏻 and thanks for explaining this By the way, what do you think if this bubble burst and how will it affect big companies and big players ?
I guess it depends how much of the stock of the certain company depended on those indexes, some companys could crash but others may just slightly decrease in value
No they’re not, they’re very simple. The idea is to play the long term game and not this buy/sell market stuff. It doesn’t matter which businesses are in the S&P500 because you’ll own a piece of them anyway. You’re investing in US business as a whole. There are no passive investors actually trying to predict anything. In exchange, the fees are 70-90% cheaper than anything else. If you read Vanguard’s book, he explains everything there and you’ll understand why it works.
*"Anyone who is not investing now is missing a tremendous opportunity." Imagine investing $1000 and receiving $13,300 in 48 hours profits, Ms Becky is the best.🌍🇺🇸*
Well, one idea for lazy investors might be to use fundamental ETFs. (personal thoughts, not financial advice) Regular passive ETFs just choose an index and invest an amount of money into each company based on the market cap. While fundamental ETFs choose the amount of money to invest in each security based on a certain fundamental on the company's financial statements. To me that would seem to go around the main problem of "these companies are performing well simply because they're part of the index".
I wrote about this problem a few years ago. Index funds and etfs are less than 40 years old. They are either a new investment paradigm or a big flop. Bubble theory: 1. Braindead investment strategy. Line only goes up, and outsourcing intelligence to fund managers is like giving up voting rights financially. New investment paradigm theory: 1. Makes it easier and cheaper for short sellers to borrow stock. Increase market liquidity and price discovery, leading to more efficient capital allocation and borrowing terms. The "outsized returns" is just a consequence of introducing this benefit to markets.
ETFs are just buying at the prices active managed funds are willing to buy at. ETFs can't drive up prices, so how can it cause a bubble? If anything, a bubble is created by too much money flowing into stocks, and there active vs passive doesn't matter
Someone give me some perspective on this thought. In terms of the potential bubble this creates what is the difference between people owning actively managed mutual funds & passively managed index funds. Obviously they have their fundamental differences & indices have their low cost & good return benefits, but when somebody buys into a mutual fund, often times the same issue occurs, people get pieces of companies they otherwise wouldn’t have invested into individually which inflated the prices of those stocks anyway. This artificial price inflation of certain stocks being in these funds has a occurred for as long as any funds have been available, the only difference is you’re moving into a passive form. Either way whether it’s actively managed or passively managed. Both forms have plenty of stock overlap & most of the time in these actively managed funds, most of their holdings consists of companies within the S&P 500 anyway. So I conclude it really doesn’t matter. Same issue over time (which has never caused a bubble issue) just shifted into a passive form. Add your thoughts on this…
This is why I invest in value funds, when Tesla with a pe above 100 entered to be one of the top largest components of the s & p 500, I knew it was time to get out.
It's profitable when market touches lower values than before or after market crash. So buying at lowest cost and selling at highest cost is the only way to make profit.
Nasdaq 100 may be up a lot more than S&P 500 today, but that is largely because tech stocks are in a bubble. It is more volatile and less diverse, so while it might look way better today, the outlook can completely change in a couple years
It's funny, people always say that if you hold cash, it's sure to go down in value. And yet, cash has been a great hold, from the end of 2021 to today. Had you been in stocks, you'd lose about 20 to 30% year to date
The largest S&P 500 index fund has an annual holdings turnover rate of about 2%...a mechanical tweaking of allocations conducted periodically to correctly reflect the index component weights. According to a 2019 measurement by Morningstar, the average active mutual fund turnover rate was 63%. Which type of investing do you believe is more likely to be the cause of a bubble? I bet it's the one with a high rate of subjective human intervention.
Hedge funds aren’t correlated to the market, they aren’t supposed to outperform an index fund. They are used by HNW people as part of a portfolio, not your only investment. That’s what most people don’t realise.
I Came here to learn how to invest after listening to a guy on radio talk about the important of investing and how he made $24,600 in 1 month and 2 weeks from $3,200 somehow this video has helped shed light on some things, but I'm still confused, I'm a newbie and I'm open to ideas.
@Albert Phillip That's impressive. Are you giving her your money or the money stays in your trading account? What's really the idea behind copying trades?
The smartest thing to do is be 100% high growth during good times and 100% bonds when it is flipping to bad times. I switched my 401k to Bonds in February
Also alot of what is in the S&P are web2 companies. Just look at how Meta share price was trashed; when a web2 company tries to LARP as a web3 company.
Complete nonsense. Picking your own indivdual stocks have way higher downside risks than any index fund, especially when most retail investors have no education on reading financial statements and understanding business models. The fact that you even mentioned crypto currencies as an alternative investment shows how poorly written this video is. Index funds will always be the way to go for 99 percent of the population.
Index funds Leeds to asset inflation, but still is the best choice for the newbie, as they don't have to pick winners. If stock market collapses, they would still pick the best among the collapse.
should cover other negative things that occur with ETFs, such as share creation by APs creating synthetic shares and making money on the volatility that comes with the FTDs this creates
I think the point of the video is summed up in the last minute. Everything has a risk although SP500 is one of the "safest" assets out there to follow. Just because we don't know all of the 500 companies, it does not mean that they are not worth being part of SP500. Because at the end of the day, the big investors focus in specific companies. So if one is great it will eventually be included in the top 500 and then more investors will buy it. That's way the weight is so different between the companies. Apple has much more value & potential that Verizon. And if Apple gets destroyed one day, a successor will be found so other companies will consume Apple's value. Also, take a look at most of the big funds out there. They hold both Index Funds (SP500, Nasdaq-100 which is more risky, Emerging Markets Etfs etc.) and individual Stocks. And this is my ideal strategy. SP500 + some other ETFs (Real Estate, Clean Energy, Technology), individual Stocks and a little bit of Gold/BTC.
If index funds held up the market then why did netflix crash so hard? If it was holding up these companies then it wouldnt of moved very much. Same with other companies that tanked in the sp500
Active Complements the Passive, Passive is not the Substitute, but I don't know finance, I want to do my main work and build saving and investing habit. People often use Core - Satellite approach, where in Core is for passive and Satellite for Active as small portion of my overall portfolio.
I’m a supporter of index fund, I think not only index fund is a bubble also the whole market is bubbling. From the past data you provided nasdaq100 wins sp500, but that can’t be the reason to buy nasdaq, since the main strategy of buying sp500 is to gain the average market return only. If you want to get higher return you can buy lottery and hope to become a millionaire or invest nft some how.
SCHD > * Value + dividends is definitely a better deal in this economy imo. I just have issues with the amount of tech stocks that are trading way high due to their valuations.
I think most of people were trading fast on Robin hood and turned the market to a casino because of hype other than crypto market. I think small percentage of people want to get rich slowly with investing in ETFs in indexs and I don't think we need to be worried about this bubble 😅
The top 10 companies from 30 years ago are not the top 10 companies now. 20-30 years the market leaders change. The SP500 captures a broader market and promotes start-up stocks from the Russel and NATURALLY (without liquidation or selling) builds a position on it overtime like what happened to TESLA. Just like an ordinary portfolio, the SP500 would tend to be heaviest on the best performing stocks as long as u don't sell it. This is why apple is 7% of the index because overtime it became more valuable. The SP500 is a self-correcting portfolio. Facebook did went down, which means it's portfolio impact dwindles throughout time to a point it becomes so small we won't notice it changing or affecting the portfolio too much.
I understand that Index Funds inflate stocks. But I don't see how they undermine the priceing mechanism. Active traders will still try to find the efficient market price, unimpaired by passive funds. Apple is worth 3 Billion, regardless of how much of it is actively traded vs. passively.
The sp500 market cap is 44 Trillon so it grow 10 percent a year so 4 Trillon a year ??! And in 7 years it doubles where does the money come from please answer
I think if index funds continue to become more popular it will likely cause a bubble but might not be big enough yet since it only accounted about 25% of equities. Nonetheless Assets are likely inflated right now the current shriller PE ratio is at 32, roughly double its historic average.
This is an asenine take.The people who are panicking don’t realize years with great highs lead to years with great lows. For fuck sake, the index funds are simply regressing to the mean🤦🏽♂️. Think long term gentlemen.
I totally agree & noticed something wrong realizing it through wanting to invest in Facebook I couldn't. Because wasn't a public offering theres like different IPO the 1sT goes to rich people & they sell to the poor. Say that because by was just frustrated of not finding Facebook on major stock company there price was well over expectations of equally being affordable to the public it's crazy ppl don't realize look4your self a new companies that should have blind success & watch you will not find them until certain periods or til there stock gets over 10 to over 25 per share shit like buying some 1 else failing business
@@LogicallyAnswered but why is that a problem? there are enough people that invest actively, that the market is quite efficiently priced. saying indexes are in a bubble is basically saying, people value the companies in that index wrong... Or in other words, you know better how the value of the companies should be than millions of other partizipants in the market
@@LogicallyAnswered Oh, youtube must have deleted my answer... weird, oh well, new try: Ok, I'll explain it a bit differently: It could very well be that indexes will fall (wheather they're in a bubble or not), But that would also mean, that the companies in that index fall, mostly the biggest companies in that index. So why call it an "index"-bubble? Because if that would happen, interestingly indexes like the S&P 500 would still fall less, than those companies in the index, as at some point these companies take less percentage in the index, so even if the biggest companies crash, the index would still fall less over a long period of time. Also, calling it generally "index" bubble is way too broad, as there are so many different kind of indices. And active investors still make more than 50% of the market, yes I am sure about that ;) According to bloomberg, if it continues like it has so far, it will take untill 2026 that passive investing overtakes active investing. The biggest position in most big companies is only about 10 percent, so saying that is most of the time an index, doesn't really say much about the other 90% investors in that stock. By the way, i'm not invested in an index, so I basically admit, my investing style will probably perform worse than the market/ has a bigger volatility risk in the long run, but I'm ok with that... (environmental reasons and it's fun to research companies) Apparently you need only about 15 different uncorrelated stocks to have quite a big diverification, so I rather do that because then I also know the companies better and can stand behind them ethically. But purely financially speaking it's not a really good desicion by me :) If someone wants to invest to make money, a global index fund is just by far the best option, one just has to prepare to wait for at least 15 years in theory. One can go further than that to have an even bigger return with factor investing, but that's how far it makes sense scientifically speaking.
You criticize the S&P for not diversifying enough, then go on to criticize them for letting their lower 400 companies drag down their average returns. Guess you needed a video topic this week.
Well, the problem is that it’s not diversifying as much as you would think and it doesn’t produce the best returns either. Also, I’m not against index funds by any means. This was just a theory that’s proposed by certain investors like Michael Burry.
8:16 i think this is a bit .... stupid(obvious/irrelevant) -> Obviously if you take best performing companies out of the index it will have MUCH lower %gains. I get the diversification gibberish but afaik S&P is quite an old concept. If you want to diversify, find a index fund that does that. Imo if society keeps being ok with this form of capitalism i think its a good thing to bet on index of 500 "best" companies even though it means you are not that diversified and that 50%+ of that index growth is generated by ~10 companies.
I wonder if this isn't why despite talking up index funds for the amateur investor, many sophisticated conservative investors seem to like municipal and US government bonds.
I don’t really see how you could get around this index fund ”bubble” by investning in the top tech stocks. The biggest tech stocks like Apple, Alphabet etc already make up a huge part of the index fund’s underlaying value. So if the s&p 500 would crash, then it would mean that all these stocks would also have to had crashed in the first place. I hope you understand my thought, my english is not the best.
The stock market has been a really tough one this past months, but I watched an interview on CNBC where the anchor ‘Jim Cramer’ kept mentioning "...KARINA MATTIS...". This prompted me to get in touch with her, and from October 2021 till now we have been working together, and I can now boast of $540k in my trading portfolio.
@@eleanorarthur2651 My advice to new investors: Buy good companies stocks and hold them as long as they are good companies. Just do this and ignore the forecasts and market views which are at best entertaining.
According to Elon Musk", Since I’ve been asked a lot: I will always advise, we buy stock in several companies that make products & services that you believe in. Only sell if you think their products & services are trending worse. Don’t panic when the market does. This will serve you well in the long-term.
I mean, it's very easy to see if index funds are a bubble, right? bubbles are formed when asset values are overly inflated so you just look at the P/E ratios of index funds to see if they're unreasonably high
Stock prices are determined by trading. Investments made in index funds consist of very few trades whereas active funds consist of the majority of the trades. So even if index funds make a bigger chunk of investments made by the retail investors (which it is currently not anyways) it wouldn't affect the price as much as the active fund managers claim it will. It makes no sense to listen to fund managers, when most of them can't beat the index in the long run and clearly have a conflict of interest with passive investing. Ben Felix made a great video on this topic.
At 5:44 you mention that passive investors do not look at PE ratios or balance sheets. Even highly "skilled" active managers who can read all these terms have been underperforming the index since long before index funds were popular and became a bubble as claimed.
