"Are Index Funds Eating the World?"

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talltodd
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"Are Index Funds Eating the World?"

Post by talltodd »

Even the father of passive investing has warned of the potential for 'chaos' if index funds get too popular

http://blogs.wsj.com/moneybeat/2016/08/ ... the-world/
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bottlecap
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Re: "Are Index Funds Eating the World?"

Post by bottlecap »

The world is not static.

If index funds become so popular that the market becomes inefficient, I will be one of the first to jump ship and go with active funds.

But I'm not holding my breath, either. At the first whiff of an extra dollar to be made, other people will jump back on with active investing, keeping us from ever getting to that point in the first place.

JT
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investorguy1
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Re: "Are Index Funds Eating the World?"

Post by investorguy1 »

bottlecap wrote:The world is not static.

If index funds become so popular that the market becomes inefficient, I will be one of the first to jump ship and go with active funds.

But I'm not holding my breath, either. At the first whiff of an extra dollar to be made, other people will jump back on with active investing, keeping us from ever getting to that point in the first place.

JT
Jack Bogle himself said that when he created the first index fund he didn't even know about the efficient market theory. With an index fund you are guaranteed to beat the majority of active investors. It doesn't matter if there are 1 million or 100. You could jump ship but the odds would still be against you.
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Re: "Are Index Funds Eating the World?"

Post by nisiprius »

"...you need a deep market of active investors willing to take a view on the valuation of the company..."

Right. And how many investors are there who can do that... competently?

There are 90 million people who own mutual funds. Let's suppose that 90% of them index. Don't you think 9 million people is enough to constitute a "deep market of active investors?"

Anyone can read a random web posting in which some says "I question whether at this time the fundamentals of Initech justify its lofty valuations" and say to friends around the watercooler, "I think Initech is overvalued, don't you?"

But people who are "willing to take a view on the valuation of a company" but don't actually have a clue don't contribute to the efficiency of the market. All they do is provide a swarm of krill for the whales to eat.
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Re: "Are Index Funds Eating the World?"

Post by Alkan »

For the life of me, I can't understand the logic behind the idea that an increase in index fund market share will somehow make it easier for professionals to out-perform the market or exploit market inefficiencies.

It's literally the opposite; In the past much of "alpha" was really just 'smart money' exploiting 'dumb money.' That was my real take away from reading The Snowball - the Warren Buffet biography.
With the rise of index funds we've seen the shift of dumb money to index funds, which just means that the smart money is left competing with smart money over the zero-sum game of beating the markets.

I disagree with most of the arguments of the magical market distorting powers of index funds, but for some reason this concept of a magical equilibrium preventing the imaginary "future chaos" is what I find the most ridiculous.
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Re: "Are Index Funds Eating the World?"

Post by DVMResident »

bottlecap wrote:If index funds become so popular that the market becomes inefficient
There is an assumption index = market cap weighted. Market cap weighting is not required to make an index fund. It's merely the most popular method. One can index to anything.

If the market is no longer setting prices (market cap = price * outstanding shares) due to convergences of price (i.e. everyone invests in market cap weighted indexed funds), funds can change bench marks, e.g. value measures. The is the basis of Arnott et al.'s Smart Beta funds (not meant to derail the thread, just an example of an alternative to market cap weighting). Everyone indexing does not mean the death of indexes-just different indexes.

This topic reminds me of the Yogi Berra quote: "Nobody goes there anymore. It's too crowded."
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Re: "Are Index Funds Eating the World?"

Post by boglephreak »

if this becomes a problem rather than a theory, the market will adapt and we will get new investment choices to counter the big-bad index funds. however, i dont see that now and i doubt stock-pickers will disappear anytime soon, so i dont worry about it.
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Re: "Are Index Funds Eating the World?"

Post by tj218 »

The one part of the article that did get me thinking was this:

"Index funds don’t “vote with their feet” by selling when they disagree with companies’ managers. They are quasi-permanent investors.

Because corporations know that, says Prof. Heemskerk, coziness and complacency may arise. “If you have only long-term investors, how do you keep management on their toes?” he asks. “Where are the checks and balances when you have such large block holdings?”

In index funds you seem to lag reality on this front. If Apple hires a poor CEO who makes poor decisions, it's only after the company has lost valuation that your stake in the company would be slightly diminished.

I do believe that it isn't a problem now or for our foreseeable future and don't plan on ditching index funds in my lifetime. But in theory, that argument could pose a problem with a majority % Index funds in the market.
Last edited by tj218 on Fri Aug 26, 2016 5:45 pm, edited 1 time in total.
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Re: "Are Index Funds Eating the World?"

Post by HomoLudens »

talltodd wrote:Even the father of passive investing has warned of the potential for 'chaos' if index funds get too popular

http://blogs.wsj.com/moneybeat/2016/08/ ... the-world/

A couple of points:
1. We are talking about the distant future if it does materialize in the way described in the article.But there is no guarantee that it will happen.
2. The catchy title of the original report is "The Silent Road to Serfdom". This is, of course, an allusion to the great book "The Road to Serfdom" by Hayek. Its concept is to use a slippery slope argument to explain the demise of individual freedom as a result of the expropriation of private property . I oversimplified it, but that's about it. I am sorry to say, but investing in in an index fund is a voluntary decision by a fairly rational economic agent ( the investor) who is fed up with the rent-seeking behavior of the active management industry. So, aside from the title there is nothing in common because these are two different cases.
3. These types of reports work with a lot of metaphors and rhetorical strategies of the type: A ( passive investing is bad because hypothetically it can go the extreme sometime in the future); that is why B ( active investing) is a better alternative. Really? This insults readers' intelligence. Even if we accept the argument on its face, it is flawed. Even if arsenic is poisonous, this doesn't make ingesting mercury much more appealing alternative.
4. Finally, people doing modelling know that they can do agent-based modelling and actually simulate this situation. I will be very interested so see the results. They will be much more interesting than reports with the message: Your future is bleak because our future is bleak and we will have to retool ourselves and get a second career as stand-up comedians. With reports like these, it's a good start ( I am talking about the original report, not about Mr. Zweig's column; he is a person whom I deeply respect even if on this occasion I disagree with him).

P.S. Howard Marks has a nice talk on Google talks. He was asked the same question at the end of the talk and his response was "no, this isn't happening any time soon"; The reason: there is another dynamic at play in addition to this hyper-positive feedback loop described in the report. It's worth checking, I don't want to ruin his argument for everyone.
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Re: "Are Index Funds Eating the World?"

Post by jwillis77373 »

Strange article.

The central thesis is.. "what if all the molecules in a glass of water suddenly stepped one atom to the left all at once"

Okay.. :(

That was fun.

Probability.. zero
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Re: "Are Index Funds Eating the World?"

Post by backpacker »

Alkan wrote:For the life of me, I can't understand the logic behind the idea that an increase in index fund market share will somehow make it easier for professionals to out-perform the market or exploit market inefficiencies.
The best thing I have ever read on this is a long blog post on Philosophical Economics. Everyone should read it. Right now. It's that good.

The author argues that there is a theoretical point at which active managers could beat passive indexers.
If the market were suffering from an inadequate amount of active management, the consequences would become evident in the performance of passive funds. Passive funds would begin to exhibit increased tracking errors relative to their benchmarks. Every time they received a cash inflow and attempted to buy shares, they would be forced to buy at the elevated ask prices set by the small number of active funds willing and able to transact with them, ask prices that they would push up through their attempted buying. Conversely, every time they received redemption requests and attempted to sell shares, they would be forced to sell at the depressed bid prices set by the small number of active funds willing to transact with them, bid prices that they would pull down through their attempted selling. On each round-trip, each buy followed by a sell, they would lodge a tracking loss relative to their indices, the mirror image of which would be the excess profit earned by the active segment in providing them with liquidity.
Last edited by backpacker on Fri Aug 26, 2016 6:02 pm, edited 2 times in total.
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Re: "Are Index Funds Eating the World?"

Post by neurosphere »

tj218 wrote:The one part of the article that did get me thinking was this:

"Index funds don’t “vote with their feet” by selling when they disagree with companies’ managers. They are quasi-permanent investors.

Because corporations know that, says Prof. Heemskerk, coziness and complacency may arise. “If you have only long-term investors, how do you keep management on their toes?” he asks. “Where are the checks and balances when you have such large block holdings?”

In index funds you seem to lag reality on this front. If Apple hires a poor CEO who makes poor decisions, it's only after the company has lost valuation that your stake in the company would be slightly diminished.

I do believe that it isn't a problem now or for our foreseeable future and don't plan on ditching index funds in my lifetime. But in theory, that argument could pose a problem with a majority % Index funds in the market.
That's not true. Suppose indexers hold 99.9% of company stock, and say they won't sell no matter what (because they have to hold the stock because it's in the index). Suppose the 0.1% only consist of two people. Those two people will set the price of 100% of the stock with their next transaction. So Apple better REALLY keep those two people happy. So it's not at all true that there is no longer checks and balances, it's just that INDEX funds don't provide those checks and balances, WHICH IS THE WHOLE POINT OF INDEXING! To let others set the price! :D

On the OTHER hand, suppose there is a vote which is subject to shareholder approval. The index fund firms get to vote. If there are more index-fund-held shares than other types, then yes, the fund companies certainly do provide "checks and balances".

And THAT is one (potentially legitimate) criticism of indexing. If one day Vanguard holds 80% of the SP500 votable shares, think how powerful Vanguard might be? Or ishares, or Fidelity, etc. And it might be that the mutual fund which is voting might have different interests than the individuals who "own" the shares (but cannot vote).

NS
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Re: "Are Index Funds Eating the World?"

Post by Taylor Larimore »

With the rise of index funds we've seen the shift of dumb money to index funds.
In my opinion, it is the smart money that is shifting to index funds. :wink:

Best wishes.
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Re: "Are Index Funds Eating the World?"

Post by TOJ »

bottlecap wrote:
If index funds become so popular that the market becomes inefficient, I will be one of the first to jump ship and go with active funds.
How would you know to do that?
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Re: "Are Index Funds Eating the World?"

Post by HomoLudens »

Taylor Larimore wrote:
With the rise of index funds we've seen the shift of dumb money to index funds.
In my opinion, it is the smart money that is shifting to index funds. :wink:

Best wishes.
Taylor

Or, prudent money. Personally, I am always suspicious of arguments involving adjectives. I do recall that in the pre-2008 era, someone popularized the term "dead equity" to stimulate homeowners to take on second mortgages and invest money on the stock market or in other financial instruments. We all know what happened afterwards. So I am happy to be called "dumb money" if this minimizes the risk to the principal.
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Re: "Are Index Funds Eating the World?"

Post by arcticpineapplecorp. »

About 90% of all individual stocks are owned by institutional investors. Those are pension funds, endowment funds, mutual funds, etc. Trading will continue to occur unless even the institutional investors stop trading. I don't really ever see this happening. Even if it did happen, it only takes two people to trade back and forth all day long. The odds are great that if/when the market becomes inefficient, people will want to exploit those inefficiencies. The rest of us can index and get the end result of all that trading.
But, [Jack Bogle] adds, that would require indexing to grow immensely from today’s levels. Probably not until passive funds are at least 90% of the market could such chaos arise, he argues.

That’s largely because index funds trade so much less often than active managers. On a typical day, only 5% to 10% of total trading volume comes from index funds, says a Vanguard spokesman. So there’s still plenty of room for active funds to set prices."
If/when this chaos happens, don't you think there will be a rash of academic papers showing how active management beats passive indexing? Then what happens? You guessed it, bunches of investors will chase returns/seek active management. You have at least one person here (bottlecap) who admitted above to do just that.

And that's essentially what Mr. Zweig's article concludes,
Economists showed long ago that in a market in which everyone has equal information, it must pay off for someone to make the extra effort to obtain superior information. So active management is unlikely ever to disappear."
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Re: "Are Index Funds Eating the World?"

Post by arcticpineapplecorp. »

One other thing I noticed from this article is that Jason Zweig's inspiration for this article comes from:
A report this past week from investment firm Sanford C. Bernstein, titled “The Silent Road to Serfdom: Why Passive Investing Is Worse than Marxism,”
Seems like the old argument that "Index funds are Un-American" is rearing it's ugly head again, but for a different reason this time.

For those unfamiliar, when Mr. Bogle first launched Vanguard's S&P500 Index fund in 1976 competitors called it "Bogle's Folly" and sent out ad copy saying "Stamp Out Index Funds. Index Funds are Un-American". The implication was that Americans would not be satisfied with "average returns" when all Americans should consider themselves above average like all the children in Lake Woebegon. The literature hadn't come out until a few decades later that index funds don't give you "average" returns, they give you the average return of the market. Because most active traders underperform the market (due to costs, etc.), then by definition the indexers wind up getting ABOVE AVERAGE returns.

So now index funds are being smeared as "worse than" marxism. Doesn't get more unAmerican than that, right?

But I'm surprised that Mr. Bogle agreed in Mr. Zweig's article with the implied negative implications of everyone indexing.
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Re: "Are Index Funds Eating the World?"

Post by AlohaJoe »

tj218 wrote:The one part of the article that did get me thinking was this:

"Index funds don’t “vote with their feet” by selling when they disagree with companies’ managers. They are quasi-permanent investors.

Because corporations know that, says Prof. Heemskerk, coziness and complacency may arise. “If you have only long-term investors, how do you keep management on their toes?” he asks. “Where are the checks and balances when you have such large block holdings?”
Why is "voting with your feet" the only way to perform corporate governance? Vanguard has an entire team dedicated to corporate governance; you can find the Vanguard web page about where they stress "we don't believe that passive indexing means passive ownership".

Vanguard is already the biggest owner of Amazon other than Jeff Bezos. They're the biggest owner of GE. I assume that they are single largest owner of the vast majority of the S&P 500.
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Re: "Are Index Funds Eating the World?"

Post by arcticpineapplecorp. »

AlohaJoe wrote:
tj218 wrote:The one part of the article that did get me thinking was this:

"Index funds don’t “vote with their feet” by selling when they disagree with companies’ managers. They are quasi-permanent investors.

Because corporations know that, says Prof. Heemskerk, coziness and complacency may arise. “If you have only long-term investors, how do you keep management on their toes?” he asks. “Where are the checks and balances when you have such large block holdings?”
Why is "voting with your feet" the only way to perform corporate governance? Vanguard has an entire team dedicated to corporate governance; you can find the Vanguard web page about where they stress "we don't believe that passive indexing means passive ownership".

Vanguard is already the biggest owner of Amazon other than Jeff Bezos. They're the biggest owner of GE. I assume that they are single largest owner of the vast majority of the S&P 500.
I think because Vanguard's been especially weak on corporate governance issues. To take one issue, they could have taken a stronger stance (use some of their influence/voting rights) to better tie CEO pay with performance. This is an important issue because the pay of CEOs comes directly out of shareholder's returns. And Vanguard has largely taken a pass on this issue. I believe even Nell Minnow (yes the movie mom too but she speaks out on corporate governance issues) has said Vanguard should have done a better job on this issue when it came up a few years ago. There's nothing wrong with paying CEOs high salaries when they improve the bottom line of their company. But the disparity between pay and performance is sometimes astounding.
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Re: "Are Index Funds Eating the World?"

Post by Ricola »

Never happen; people always think they are smarter, and this time is different, Illusory superiority.
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Re: Worse than Marxism

Post by telemark »

Investors of the world, unite! You have nothing to lose but your fees...
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Re: "Are Index Funds Eating the World?"

Post by stratton »

The 4000+% annual turnover on SPDR S&P 500 ETF (SPY) says there is a lot of price discovery going on.

Paul

Edit: replaced 5800% because I overstated it since the share price has gone up over the last year. I was using (daily share turnover ) x (share price) x (250 days) / (total SPY assets). Better to calculate a daily % turnover and multiply by 250 days to remove that problem.
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Re: "Are Index Funds Eating the World?"

Post by indexingfun »

OK, someone needs to sacrifice their financial future for the greater good by moving their investments to actively managed funds. You first.
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Re: "Are Index Funds Eating the World?"

Post by nisiprius »

John C. Bogle has been warning for a long time about the bad aspects of moving from "owner capitalism to managers' capitalism." He wrote a whole book about this, The Battle for the Soul of Capitalism, which I actually read--but didn't find very helpful and have forgotten most of it, because it is mostly of interest to people in a more of position to control companies than me.

In 2003 he wrote:
The classic system—owners capitalism—had been based on a dedication to serving the interests of the corporation’s owners, maximizing the return on their capital investment. But a new system developed—managers capitalism—in which [William Pfaff wrote that] “the corporation came to be run to profit its managers, in complicity if not conspiracy with accountants and the managers of other corporations.”....
[The problem is] (1) the diffusion of corporate ownership among a large number of investors, none holding a controlling share of the voting power; and (2) the unwillingness of the agents of the owners—the boards of directors—to honor their responsibility to serve, above all else, the interests of their principals—the shareowners themselves.
He has been complaining for a long time of failure of mutual fund companies in general, and, by name, Vanguard in particular--and all mutual funds, (not just index funds)--to do what he thinks is their duty to influence corporate governance by voting their shares against management when necessary. (Among other things, he's specifically complained that they have not used their votes to force companies to exercise restraint on CEO salaries).

Now, the detail that I'm afraid I'm vague on, and it's fairly soft, but Bogle is not alone in making this criticism and I have the impression it has been having some effect. I have read news stories that suggest that mutual fund companies are becoming somewhat more active in this regard than they used to be.
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Re: "Are Index Funds Eating the World?"

Post by afan »

As indexing continues to grow active managers find it more difficult to hold on to assets, let alone bring in new money. Since these managers get paid based on the assets the manage and the expense ratios they can charge, anything that reduces either one is a threat. Indexing targets both.

If active managers are of negative value, then investors will flee. If active managers charge too much money and run up unnecessary expenses, then investors will flee.

Therefore, from the view if an active manager, indexing is an existential threat.

They can continue trying to find someone who will believe active management outperforms the broad market- an increasingly tough challenge locating the suckers who will go along with that notion . Instead, write articles claiming that, out performance notwithstanding, indexing is inherently evil and will lead to flat feet, bad breath and tooth decay. These articles are written by active managers for active managers. Apparently it makes them feel better as they confront their declining futures.

If you are all in index funds and feel sorry for the active managers then write them a check to tide them over until they find honest work.
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Re: "Are Index Funds Eating the World?"

Post by SGM »

Sometimes, I think BHs are not reading the same piece I am reading. Jack said market chaos would not occur unless indexing was 90% of the market. We are so far from that it is ridiculous.
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Re: "Are Index Funds Eating the World?"

Post by leonard »

How man arbitrageurs does it take to keep prices in line? What are the barriers to entry to do arbitrage?

Answer these 2 questions and you'll see why this issue isn't one.
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Re: "Are Index Funds Eating the World?"

Post by arcticpineapplecorp. »

nisiprius wrote:John C. Bogle has been warning for a long time about the bad aspects of moving from "owner capitalism to managers' capitalism." He wrote a whole book about this, The Battle for the Soul of Capitalism, which I actually read--but didn't find very helpful and have forgotten most of it, because it is mostly of interest to people in a more of position to control companies than me.

In 2003 he wrote:
The classic system—owners capitalism—had been based on a dedication to serving the interests of the corporation’s owners, maximizing the return on their capital investment. But a new system developed—managers capitalism—in which [William Pfaff wrote that] “the corporation came to be run to profit its managers, in complicity if not conspiracy with accountants and the managers of other corporations.”....
[The problem is] (1) the diffusion of corporate ownership among a large number of investors, none holding a controlling share of the voting power; and (2) the unwillingness of the agents of the owners—the boards of directors—to honor their responsibility to serve, above all else, the interests of their principals—the shareowners themselves.
He has been complaining for a long time of failure of mutual fund companies in general, and, by name, Vanguard in particular--and all mutual funds, (not just index funds)--to do what he thinks is their duty to influence corporate governance by voting their shares against management when necessary. (Among other things, he's specifically complained that they have not used their votes to force companies to exercise restraint on CEO salaries).

Now, the detail that I'm afraid I'm vague on, and it's fairly soft, but Bogle is not alone in making this criticism and I have the impression it has been having some effect. I have read news stories that suggest that mutual fund companies are becoming somewhat more active in this regard than they used to be.
I'm sorry I didn't mean to imply that Mr. Bogle doesn't believe CEO pay should be more closely aligned with a company's performance. I was referencing and did mention specifically that "Vanguard took a pass" on this issue a few years ago. Jack was not at the helm at that time so I never meant to imply he didn't do enough to curb the excesses of Wall Street/bonuses/executive compensation, etc. But I do think Vanguard could have taken a stronger (or any) stance on the issue to curb the excesses, especially when they aren't warranted/justified.

And yes SGM, you're right. In the end Jack doesn't think everyone indexing will be a problem for a long time (if ever). I guess I was just surprised to hear him admit that it "could be a problem". I obviously haven't thought deeply enough about the issue to understand the implications of everyone indexing like Jack and others have. I guess its because I believe that if it ever happens, the market (which is comprised of individual actors) will take the actions that they believe are in their best self-interest. That means, they'll abandon indexing for active management. And then we'll be right back to where we are now. So I don't really see how this ever becomes a problem.

Those buying and selling individual shares (the institutional players) will have to vote with their feet. We indexers can not really do that except en masse (selling the stock market to buy the bond market for instance). So companies will be rewarded or punished in the long run for the same reason as always: whether or not they increase shareholder value over time.
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Re: "Are Index Funds Eating the World?"

Post by nedsaid »

My take is that indexing mostly works because it is cheap. I also believe that active investing will never go away. Also you have the passive investing as practiced by DFA which attempts to capture factors and utilizes stock screens. I would argue that DFA is doing a form of active investing but with much lower turnover and patient trading strategies. The "passive" funds that factor load will in themselves do a lot to keep the markets efficient.

Trading and arbitrage is never going away. There are people born all the time who seem to have this in their blood if not their genes. Always someone out there who will try it.

Probably a better question is this: How much market share do the active managers have to have to keep the markets efficient? My off the top of my head guess is 30% to 40%. We are a long ways from that.
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Re: "Are Index Funds Eating the World?"

Post by Angelus359 »

It really bothers me that mutual funds with intent to maximize profits above all else took over, as vanguard continually votes against environmental responsibility
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Re: "Are Index Funds Eating the World?"

Post by nisiprius »

Angelus359 wrote:It really bothers me that mutual funds with intent to maximize profits above all else took over, as vanguard continually votes against environmental responsibility
Just for the record, you should be aware that Vanguard does offer the Vanguard FTSE Social Index fund, VFTSX. am not, not, not recommending it. In fact I actually invested in it for a couple of years, a decade or so ago, and gave up.

Vanguard FTSE Social Index fund is an index fund, with 0.25% ER; no Admiral shares or ETF is available. It tracks the FTSE4GOOD U.S. Select index. Vanguard describes it as investing in
stocks that have been screened for certain social, human rights, and environmental criteria.
Rather oddly (note my boldface) FTSE itself describes it this way:
The FTSE4Good US Select Index is a socially responsible investment (SRI) index of US stocks that excludes companies with certain business activities such as weapons, tobacco, gambling, alcohol, nuclear power, and adult entertainment. Additionally, in order to be included companies must meet a series of stringent environmental and social criteria in areas including environmental management, labor rights, human rights, health and safety, and diversity. Please contact Vanguard [!!!!--Nisi] for further information about this index.
Environmental considerations are said to include these (grey sector, upper right)

Image

Morningstar considers it to be a "large blend" fund. They give it a three-star rating meaning that, allowing for risk and style, and comparing it with others in its class, its performance has been middle of the road. They give it a "bronze" analyst rating, which tells you their analysts' human opinion of the fund. It (blue) has, however, noticeably underperformed the plain vanilla S&P 500 index fund (orange).

Source
Image
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jwillis77373
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Re: "Are Index Funds Eating the World?"

Post by jwillis77373 »

How is it this article demonizes Index Funds for being "passive".

While it doesn't examine "active" management as being a Ponzi scheme constructed with the purpose of driving up transactions fees for the benefit of the executor?

Isn't "blind" trading with the sole goal of generating trades just as devoid of "managerial governance" responsibilities where it comes to punishing companies for not behaving in their investors best interests? -- To me, that is effectively "passive" investment with an "actively managed" Fund.

I think this strawman argument is somewhat "skin deep" in that it doesn't address "real Index and real Active" investing.. but fictiously convenient "fantasy funds".
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Zweig: Index Funds as a threat to market vitality

Post by LeeMKE »

http://blogs.wsj.com/moneybeat/2016/08/ ... the-world/

This article was IMHO a puff piece intended to assuage the managed fund advertisers, but weak in its theory that a ponderance of Index Fund investment would endanger the marketplace. Interestingly, the comments are strongly supportive of index investing, pointing out correctly that 1) It would take a massive increase in index investing to begin to gum up the market valuations, and 2) Index funds create a sandbox for active management to affect their strategies without the unpredictable nature of amateurs in the way.

There are a few commenters who are still proposing that individual investors should be aggressive in individual investing: there's always some folks who didn't read the homework.
Last edited by LeeMKE on Sun Aug 28, 2016 1:37 pm, edited 2 times in total.
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Re: "Are Index Funds Eating the World?"

Post by LadyGeek »

I merged LeeMKE's post into here.
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Re: "Are Index Funds Eating the World?"

Post by leonard »

Angelus359 wrote:...as vanguard continually votes against environmental responsibility
I'm guessing there is more context to this statement - but I didn't see it earlier in the thread. What do you mean by this? Exactly where, how and when did Vanguard vote against environmental responsibility?
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Re: "Are Index Funds Eating the World?"

Post by lemonPepper »

[sarcasm]
I don't know about you guys but I've a phd from MIT in maths and I'm definitely smarter than 99% of people out there.
I can understand things that most other people cannot. I will put big data to work and analyze news, twitter feeds, facebook posts to figure out what is going to be the next big thing.

Also, I'm definitely smarter than warren buffett. If he can beat the market, why can't I?

[/saracasm]
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Re: "Are Index Funds Eating the World?"

Post by bottlecap »

TOJ wrote:
bottlecap wrote:
If index funds become so popular that the market becomes inefficient, I will be one of the first to jump ship and go with active funds.
How would you know to do that?
I don't know - I don't expect it to happen.

That's my point.
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AllianceBernstein, Karl Marx, and Index Investing

Post by AzRunner »

Good article by John Rekenthaler.
http://news.morningstar.com/articlenet/ ... ?id=768078

"Aiming High
Of the paper itself, I am less envious. It certainly is ambitious. Topics include
Marxist principles of social planning;
Correlations of global stock prices;
An 18-page analysis of the economics of mining companies;
Funding shortfalls in defined-benefit plans;
The role of fiduciaries;
Environmental, social, and governance (ESG) investing;
The average holding period for mutual fund shareholders.
The authors' inventiveness extends to their citations; in one passage, they quote Marx, then the Old Testament (Genesis), then the Etymologies of St. Isidore of Seville. (Sadly, they neglected Milton, who inspired a genius yet to be born.)
What this all means, I have no idea."

I know the issue of how much passive investing is too much has been beaten to death, but Rekenthaler puts some theory behind where to place that point.

Norm
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Re: "Are Index Funds Eating the World?"

Post by LadyGeek »

^^^ I moved AzRunner's post into here, which is a follow-up to the original article.

Please remain focused on investing. Discussion of political principles is off-topic.
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"Indexing Fears Overblown"

Post by Taylor Larimore »

Bogleheads:

Morningstar has an article about this topic:

Indexing Fears Overblown

Best wishes
Taylor
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selters
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Re: "Indexing Fears Overblown"

Post by selters »

Taylor Larimore wrote:Bogleheads:

Morningstar has an article about this topic:

Indexing Fears Overblown

Best wishes
Taylor
I don't worry about markets becoming inefficient.But I do worry somewhat about what will happen to corporate governance when (not if) index fund providers (mostly Vanguard and Blackrock) own 20%, 30%, 40%, 50% of the world's public companies.

Didn't Jack Bogle himself ask the question at the most recent Bogleheads conference what will happen when (not if) Vanguard owns 10% of the S&P 500. Isn't there a law or something that says no single owner can own more than 10% of a publicly traded company?
Last edited by selters on Fri Oct 14, 2016 11:47 am, edited 1 time in total.
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Re: "Indexing Fears Overblown"

Post by Da5id »

selters wrote: Didn't Jack Bogle himself ask the question at the most recent Bogleheads conference what will happen when (not if) Vanguard owns 10% of the S&P 500. Isn't there a law or something that says no single owner can own more than 10% of a publicly traded company?
Does Vanguard "own" anything? Individual funds are independent. Even if the individual S&P 500 fund eventually owns 10% of the indexed companies (roughly 1.9 trillion currently), I don't know if that is a problem. Are the shareholders of the Vanguard mutual fund the "owners" here?
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Re: "Indexing Fears Overblown"

Post by selters »

Da5id wrote:
selters wrote: Didn't Jack Bogle himself ask the question at the most recent Bogleheads conference what will happen when (not if) Vanguard owns 10% of the S&P 500. Isn't there a law or something that says no single owner can own more than 10% of a publicly traded company?
Does Vanguard "own" anything?
I don't know exactly how Vanguard "owns" the shares in their funds. But as far as I know, Vanguard holds the right to vote on behalf of the shareholders of their funds. And also, I don't think individual Vanguard funds can vote independently; at shareholder meetings the Vanguard S&P 500 and the Vanguard Total Stock Market index fund cannot vote independently. All shares held by Vanguard vote in unison. I may be mistaken here.
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Re: "Are Index Funds Eating the World?"

Post by WhiteShadow »

1. Markets are generally efficient, but the level of efficiency varies over time. For example, during the 2008 financial crisis. When markets become less efficient active managers are more likely to beat the market. A good example of this is Vanguard's own actively managed Primecap fund, VPMCX. It has outperformed the S&P 500 over the last 10 and 15 years, with the majority of those gains occurring in 2007, 2008, and 2009. Bloomberg recently wrote an article showing more active managers beating the market due to recent volatility.

http://bloom.bg/2chKYR5

2. You don't have to invest 100% passive or 100% active, you can choose a mix of the two. It's not a bad idea to put a portion of your portfolio into active funds provided the fees are reasonable; which can often be the case in large employer sponsored 401k plan that can buy institutional shares. I go with 25% to 50% active and avoid funds that charge more than 1%.

3. You're not investing all of your money at once and just letting it ride, you are making a series of investments over decreasing time periods. During some of those periods index strategies will do better, for others there are opportunities for active management.

All in all, while I do think that the majority of the market and the majority of your portfolio should follow an index strategy, there is still a strong diversification argument to hold a portion of your portfolio in active funds.
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Re: "Are Index Funds Eating the World?"

Post by neurosphere »

WhiteShadow wrote:For example, during the 2008 financial crisis. When markets become less efficient active managers are more likely to beat the market. A good example of this is Vanguard's own actively managed Primecap fund, VPMCX. It has outperformed the S&P 500 over the last 10 and 15 years, with the majority of those gains occurring in 2007, 2008, and 2009. Bloomberg recently wrote an article showing more active managers beating the market due to recent volatility.
Of course there were other funds that did not perform as well as their benchmark index during the downturn. How can we predict in advance which active funds to own in anticipation of (potential) outperformance during the next inefficient period? Will the extra cost of actively managed funds during "efficient" periods where they will lag the market, make up for the (possible) outperformance during other periods?

I'm pretty sure this has been studied extensively. We shouldn't have to rely on anecdotes and outliers (such as Primecap).
WhiteShadow wrote:All in all, while I do think that the majority of the market and the majority of your portfolio should follow an index strategy, there is still a strong diversification argument to hold a portion of your portfolio in active funds.
I'm pretty sure (correct me if I'm wrong) that over long time frames which include both up and down markets, various political "crises", "one-time events", and multiple "inefficient periods", etc., that it is the rare active fund which beats their benchmark. [Check out figure 9 at this link from Vanguard: https://personal.vanguard.com/pdf/s296.pdf] Thus, "diversifying" a portfolio by adding active funds is dramatically more likely to result in less dollars in one's pocket in the long run, and most likely with increased volatility along the way (see figure 5 at the link above for data showing the decreased return + increased volatility of active strategies).

Why would I want to add actively managed funds to my portfolio?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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