Passive investing now controls nearly half the US stock market

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
John Z
Posts: 436
Joined: Sun Nov 14, 2010 5:42 pm

Passive investing now controls nearly half the US stock market

Post by John Z »

From CNBC:

https://www.cnbc.com/2019/03/19/passive ... arket.html

"Market share for passively managed funds has risen to 45 percent, up a full point from June 2018, according to data this week from Bank of America Merrill Lynch. That continues a trend over the past decade in which investors have moved to indexing, particularly through exchange-traded funds."

Article has several more paragraphs and a chart.
Thesaints
Posts: 3464
Joined: Tue Jun 20, 2017 12:25 am

Re: Passive investing now controls nearly half the US stock market

Post by Thesaints »

If it is truly passive, it doesn't control it.
klaus14
Posts: 491
Joined: Sun Nov 25, 2018 7:43 pm

Re: Passive investing now controls nearly half the US stock market

Post by klaus14 »

the question is at what level we will start seeing adverse effects?

My guess is problems will start manifesting as large tracking errors.
Let's say, 98% is passive. In this case 2 active traders will make a trade and 98 passive will try to follow it. They will overshoot & undershoot. Lots of tracking error.

Until tracking errors are significant, i think we are fine in this regard, except...

Now most of the market is not participating in price discovery. Price discovery is expensive and we passive investors are basically free riding. Less money spent on price discovery means prices are less correct. I think we already started seeing the effects of this. There are probably a greater number of significantly mispriced stocks compared to 5 years ago.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.
User avatar
mokaThought
Posts: 93
Joined: Tue Jan 01, 2019 7:57 pm
Location: Texas
Contact:

Re: Passive investing now controls nearly half the US stock market

Post by mokaThought »

klaus14 wrote: Tue Mar 19, 2019 2:09 pm Now most of the market is not participating in price discovery. Price discovery is expensive and we passive investors are basically free riding. Less money spent on price discovery means prices are less correct. I think we already started seeing the effects of this. There are probably a greater number of significantly mispriced stocks compared to 5 years ago.
Is it fair to say this will "correct itself" in time as investors find greater opportunities in taking advantage of mispriced investments?
October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February. —Mark Twain
klaus14
Posts: 491
Joined: Sun Nov 25, 2018 7:43 pm

Re: Passive investing now controls nearly half the US stock market

Post by klaus14 »

mokaThought wrote: Tue Mar 19, 2019 2:15 pm
klaus14 wrote: Tue Mar 19, 2019 2:09 pm Now most of the market is not participating in price discovery. Price discovery is expensive and we passive investors are basically free riding. Less money spent on price discovery means prices are less correct. I think we already started seeing the effects of this. There are probably a greater number of significantly mispriced stocks compared to 5 years ago.
Is it fair to say this will "correct itself" in time as investors find greater opportunities in taking advantage of mispriced investments?
Some will do. But less and less people (and institutions) are now interested in doing that. Because it's costly.
This is a problem.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.
User avatar
Taylor Larimore
Advisory Board
Posts: 29967
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Passive investing now controls nearly half the US stock market

Post by Taylor Larimore »

John Z:

Members of the Bogleheads Forum can take pleasure knowing that we have been helpful promoting Jack Bogle's index funds and low costs. This is a portion of Jack's "Dedication" in his book, "John Bogle on Investing. The First 50 Years."

"Dedicated to all the human beings who have meant so much to me -- especially those "Bogleheads" of the Internet, that dedicated and loyal cadre of Vanguard Diehards who give me strength to carry on my mission."

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
klaus14
Posts: 491
Joined: Sun Nov 25, 2018 7:43 pm

Re: Passive investing now controls nearly half the US stock market

Post by klaus14 »

Passive investing is very good for individuals. But not as good for society. Classic tragedy of commons. We would all be better of if everyone paid some active management to engage in price discovery instead of free riding.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.
User avatar
Elric
Posts: 296
Joined: Sat Dec 08, 2018 12:23 am
Location: Virginia
Contact:

Re: Passive investing now controls nearly half the US stock market

Post by Elric »

klaus14 wrote: Tue Mar 19, 2019 2:26 pm Passive investing is very good for individuals. But not as good for society. Classic tragedy of commons. We would all be better of if everyone paid some active management to engage in price discovery instead of free riding.
Good point!
Thesaints wrote: Tue Mar 19, 2019 1:57 pm If it is truly passive, it doesn't control it.
True, but those who create the indices do.For example, a lot of folks use the S&P 500 either as their large cap investment or their substitute for total market, since the total market is heavily dominated by large cap. When a stock enters or leaves, that will, I suspect, generate a huge swing in demand, and hence on price, more than the fundamentals for that particular stock likely warrants.
"No man is free who works for a living." | Illya Kuryakin
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Passive investing now controls nearly half the US stock market

Post by Phineas J. Whoopee »

Although that's what the article says, its headline isn't what it means. It's not talking about the totality of the US stock markets, just the parts owned by mutual funds and ETFs.

Jeff Cox at CNBC knows better.

PJW
User avatar
vineviz
Posts: 7839
Joined: Tue May 15, 2018 1:55 pm

Re: Passive investing now controls nearly half the US stock market

Post by vineviz »

klaus14 wrote: Tue Mar 19, 2019 2:26 pm Passive investing is very good for individuals. But not as good for society. Classic tragedy of commons. We would all be better of if everyone paid some active management to engage in price discovery instead of free riding.
Maybe, but the number of "active" investors actually needed for price discovery is vanishingly small. In theory, it only takes two.

If we have two well paid portfolio managers and give each a team of 20 top-notch analysts, your all-in cost for price discovery would be less than $20 million/year while the US market cap is $30 trillion.

Even if you assume that passive investors don't contribute anything to price discovery (a dubious assumption given the AUM in smart beta and size/style/sector funds that fall under the "passive" umbrella), that means the free riding cost of an investor with $100,000 amounts to something like $0.02 per year. It'd cost way more to collect that fee than it generate.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Passive investing now controls nearly half the US stock market

Post by Phineas J. Whoopee »

klaus14 wrote: Tue Mar 19, 2019 2:26 pm Passive investing is very good for individuals. But not as good for society. Classic tragedy of commons. We would all be better of if everyone paid some active management to engage in price discovery instead of free riding.
What if everybody indexed?

PJW
User avatar
Nate79
Posts: 6431
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Passive investing now controls nearly half the US stock market

Post by Nate79 »

A one percent change. It went from 44 to 45% and that got someone an article published? How is the one percent gain news worthy?
BJJ_GUY
Posts: 313
Joined: Wed Mar 13, 2019 7:45 am

Re: Passive investing now controls nearly half the US stock market

Post by BJJ_GUY »

Phineas J. Whoopee wrote: Tue Mar 19, 2019 2:54 pm Although that's what the article says, its headline isn't what it means. It's not talking about the totality of the US stock markets, just the parts owned by mutual funds and ETFs.

Jeff Cox at CNBC knows better.

PJW
Agree. This was the first thing I noticed.

However, I'm not sure where the data can be accessed, but I think the aggregate dollars allocated to passive "mandates" is actually a larger percentage of the total US market. I may be wrong, but am pretty sure the passive % increases when accounting for institutional separate accounts and internally managed capital for endowments, foundations, pensions, and insurance companies etc. (Note: This figure includes index-tracking passive, and benchmark-hugging mandates, as benchmark huggers vary by the smallest amount from the index and don't trade enough to have a materially different impact compared to the pure passive strategy.)
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Passive investing now controls nearly half the US stock market

Post by Phineas J. Whoopee »

BJJ_GUY wrote: Tue Mar 19, 2019 3:09 pm
Phineas J. Whoopee wrote: Tue Mar 19, 2019 2:54 pm Although that's what the article says, its headline isn't what it means. It's not talking about the totality of the US stock markets, just the parts owned by mutual funds and ETFs.

Jeff Cox at CNBC knows better.

PJW
Agree. This was the first thing I noticed.

However, I'm not sure where the data can be accessed, but I think the aggregate dollars allocated to passive "mandates" is actually a larger percentage of the total US market. I may be wrong, but am pretty sure the passive % increases when accounting for institutional separate accounts and internally managed capital for endowments, foundations, pensions, and insurance companies etc. (Note: This figure includes index-tracking passive, and benchmark-hugging mandates, as benchmark huggers vary by the smallest amount from the index and don't trade enough to have a materially different impact compared to the pure passive strategy.)
Certainly more must be indexed than just in retail funds, but I know of no data to suggest it's nearly half the total value as the article's headline falsely claims.

PJW
DonIce
Posts: 1125
Joined: Thu Feb 21, 2019 6:44 pm

Re: Passive investing now controls nearly half the US stock market

Post by DonIce »

The more people invest passively in indexes and the less people price the stocks of individual companies, the more often there will be chances for individual companies being mispriced, generating eventual returns for those who do look at the valuations of individual companies. As the returns of that method of investing increase, more people will be drawn back to it. This will result in an equilibrium of some sort.
IlliniDave
Posts: 2327
Joined: Fri May 17, 2013 7:09 am

Re: Passive investing now controls nearly half the US stock market

Post by IlliniDave »

Is that half the entire US stock market, or half the retail mutual fund market? The total value of the stock market is over $30T I believe. $4T doesn't seem like half of that.
Don't do something. Just stand there!
BJJ_GUY
Posts: 313
Joined: Wed Mar 13, 2019 7:45 am

Re: Passive investing now controls nearly half the US stock market

Post by BJJ_GUY »

IlliniDave wrote: Tue Mar 19, 2019 6:28 pm Is that half the entire US stock market, or half the retail mutual fund market? The total value of the stock market is over $30T I believe. $4T doesn't seem like half of that.
See comment I made above...

But, you are correct, I believe this article only refers to ETFs and mutual funds. However, I've heard (I think, but could be completely incorrect) credible sources estimate that once institutional capital is accounted for, passively invested capital as a % of the total US market actually increases compared to the split in retail vehicles. (I'll look for the support on this claim to substantiate.)
TJSI
Posts: 385
Joined: Thu Jan 27, 2011 4:03 pm

Re: Passive investing now controls nearly half the US stock market

Post by TJSI »

Several people have mentioned the issue of defining the "market". It is a topic for which I have never seen a clear or good study.

Instead you usually see references to traders, sovereign funds, institutional investors, endowments, pension funds, and retail investors but never a good breakdown of who owns what or who is participating in daily trades.

Does the SEC ever produce a report of ownership? Surely each company in the S&P 500 has some knowledge of who their stock owners are. But is a summary report ever issued?
User avatar
nisiprius
Advisory Board
Posts: 41993
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Passive investing now controls nearly half the US stock market

Post by nisiprius »

klaus14 wrote: Tue Mar 19, 2019 2:26 pm Passive investing is very good for individuals. But not as good for society. Classic tragedy of commons. We would all be better of if everyone paid some active management to engage in price discovery instead of free riding.
How do you feel about price tags in supermarkets? Is society being harmed when I pay a marked price at the supermarket instead of participating in price discovery by haggling over the price with the cashier? Was John Wanamaker a villain? Should price tags be banned?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
MindBogler
Posts: 1026
Joined: Wed Apr 17, 2013 12:05 pm

Re: Passive investing now controls nearly half the US stock market

Post by MindBogler »

The problem with all these discussions is they seem to presuppose that all investors currently indexing are in the same phase: buy and hold. We know that is false and it always will be. People, for various reasons, are both accumulating and selling simultaneously. Indexers aren't a giant hive mind acting singularly. To my mind the whole argument is taken to absurdity.

Even if it were true, there would come a point where pricing errors would lead to an equilibrium of arbitrage between indexing and active management.
BJJ_GUY
Posts: 313
Joined: Wed Mar 13, 2019 7:45 am

Re: Passive investing now controls nearly half the US stock market

Post by BJJ_GUY »

TJSI wrote: Tue Mar 19, 2019 7:58 pm Several people have mentioned the issue of defining the "market". It is a topic for which I have never seen a clear or good study.

Instead you usually see references to traders, sovereign funds, institutional investors, endowments, pension funds, and retail investors but never a good breakdown of who owns what or who is participating in daily trades.

Does the SEC ever produce a report of ownership? Surely each company in the S&P 500 has some knowledge of who their stock owners are. But is a summary report ever issued?
Isn't the market, in the context of this topic pretty easily defined? It's just all shareholders representing the free floating public universe of stocks. I guess the issue is whether we're speaking specific to US stocks or global stocks. I believe we are referring to US stock market in this case.

To your question, there is no way to determine the precise make-up of all US publicly traded stockholders ("the market").

Companies do have a list of all holders, but don't freely share it unless obligated by law in certain circumstances.

The only other way to even begin piecing the puzzle, that im aware of, is 13D filings (more than 5% ownership stake). 13f reports are probably useless in determining the market constitutes, though another way to find ownership reporting.

Would be curious if anyone else reading this has sources of more detailed information here.
Jim180
Posts: 433
Joined: Wed Jun 26, 2013 9:47 pm

Re: Passive investing now controls nearly half the US stock market

Post by Jim180 »

Passive investing controls 45% of stock market FUNDS , but I don't think 45% of stock market activity. The traders always have, and I assume always will control the market itself. There are still wild swings based upon political and economic news each day which I assume wouldn't occur if buy and hold investors controlled a large share of the market.
klaus14
Posts: 491
Joined: Sun Nov 25, 2018 7:43 pm

Re: Passive investing now controls nearly half the US stock market

Post by klaus14 »

nisiprius wrote: Tue Mar 19, 2019 8:01 pm
klaus14 wrote: Tue Mar 19, 2019 2:26 pm Passive investing is very good for individuals. But not as good for society. Classic tragedy of commons. We would all be better of if everyone paid some active management to engage in price discovery instead of free riding.
How do you feel about price tags in supermarkets? Is society being harmed when I pay a marked price at the supermarket instead of participating in price discovery by haggling over the price with the cashier? Was John Wanamaker a villain? Should price tags be banned?
Well, your analogy actually supports what i said.
You don't go and buy every product from every store. You choose Trader Joe's over Whole Foods (or otherwise), and even there you choose this wine over that wine weighing price vs value. Then some stores and some products go out of business or change prices. This is price discovery you engage in.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.
TJSI
Posts: 385
Joined: Thu Jan 27, 2011 4:03 pm

Re: Passive investing now controls nearly half the US stock market

Post by TJSI »

BJJ_GUY

Thank you for your comments. Yes, the US market is the referenced market and the S&P 500 would be a good proxy for it.

I find it both amusing and frustrating that the most basic of information on the "market" seems to be covered in fog.
Perhaps the FED has produced a report on market owners and participants.

TJSI
AlohaJoe
Posts: 5534
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Passive investing now controls nearly half the US stock market

Post by AlohaJoe »

klaus14 wrote: Tue Mar 19, 2019 2:09 pm Now most of the market is not participating in price discovery. Price discovery is expensive and we passive investors are basically free riding. Less money spent on price discovery means prices are less correct. I think we already started seeing the effects of this. There are probably a greater number of significantly mispriced stocks compared to 5 years ago.
This is extremely unlikely. In 1993 there were 1,167 mutual funds in the US. In 2017 there were 9,356 mutual funds in the US. If we assume that 50% of them are passive (which is wrong; passive controls a lot of assets but relatively few funds) that still leaves over 4,600 active funds doing price discovery. That four times the number of funds that existed in 1993. Unless the argument is that prices in 1993 were totally and completely wrong due to insufficient price discovery.

Not to mention the incredible increase in international investors, hedge funds, sovereign wealth funds, family offices, and endowments all of whom have far more ability & incentive to do price discovery than mutual fund managers (who often can coast due to people not moving thanks to locked-in capital gains). And that's on top of structural changes like easy access to EDGAR filings, deep learning of volumes of data, additional academic research, and so on.

And how bad must price discovery have been in 1945 when there were only 68 mutual funds and stock prices weren't even published daily?

My guess is that we could do effective price discovery with only a few thousand active investors. In an old blog post from philosophicaleconomics (that I'm paraphrasing from memory, so might have the details wrong), for every single public company in America if we hired 10 full-time analysts who did nothing expect spend 60 hours a week analyzing that one stock it seems plausible that we'd have pretty good price discovery; that's only ~40,000 active investors to make the entire US stock market "efficient".

And if we take the insight that the S&P 500 drives the vast majority of returns for the total stock market, the number of active investors needed drops to just 5,000.

By way of comparison, Motley Fool -- who are all about stock picking & price discovery -- has over 1.5 million subscribers (though it is hard to know how many of them actually act on their subscriptions, as opposed to simply reading for entertainment value/aspirational dreaming.)
Last edited by AlohaJoe on Tue Mar 19, 2019 9:40 pm, edited 1 time in total.
AlphaLess
Posts: 2679
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky

Re: Passive investing now controls nearly half the US stock market

Post by AlphaLess »

klaus14 wrote: Tue Mar 19, 2019 2:09 pm the question is at what level we will start seeing adverse effects?

My guess is problems will start manifesting as large tracking errors.
Let's say, 98% is passive. In this case 2 active traders will make a trade and 98 passive will try to follow it. They will overshoot & undershoot. Lots of tracking error.

Until tracking errors are significant, i think we are fine in this regard, except...

Now most of the market is not participating in price discovery. Price discovery is expensive and we passive investors are basically free riding. Less money spent on price discovery means prices are less correct. I think we already started seeing the effects of this. There are probably a greater number of significantly mispriced stocks compared to 5 years ago.
That's not quite true.

Total US Market cap: around $26Trillion.
Total volume traded PER day in US Equities: around $350B (https://markets.cboe.com/us/equities/market_share/). That includes ETFs and stocks.
Add total traded in the future's market: around $300-400B.

So total volume traded in US equities market: $800B. That is 3% of the market cap traded, per day.
MOST of the volume traded per day is two-sided (direction determined by the party initiating the trade; as otherwise, there is a buy for every sold share). Very little volume traded is one-sided, as one sided volume will move the market a lot.

To trade futures in one direction (without a hedge), you need 15% in margin.
In order to trade $100B worth of futures in one direction, you need $15B.

Trading $100B of futures in one direction will move the market BIGLY.

Now, you see that it does not take that many active assets to move the prices.
If you gave a good trader $100B in capital, the havoc caused in US equities market will be such that you will not find a place on Earth to hide from your portfolio pain. That is *JUST* 0.3% of the US stock market cap.

As for the *RELATIVE* prices of stocks, you don't need long-only active strategies to move their prices to equilibrium.
You have long-short, quantitative, market and factor neutral portfolios doing that. They have literally ZERO dollars in NET long assets.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
venkman
Posts: 1191
Joined: Tue Mar 14, 2017 10:33 pm

Re: Passive investing now controls nearly half the US stock market

Post by venkman »

klaus14 wrote: Tue Mar 19, 2019 2:09 pm My guess is problems will start manifesting as large tracking errors.
Let's say, 98% is passive. In this case 2 active traders will make a trade and 98 passive will try to follow it. They will overshoot & undershoot. Lots of tracking error.
2 active traders will make a trade and 98 passive investors will continue to do nothing. Because they're passive investors.
Storcher
Posts: 26
Joined: Wed Jul 30, 2014 2:57 am

Re: Passive investing now controls nearly half the US stock market

Post by Storcher »

'Big Short' investor warns of a bubble in passive investing.
There’s a ‘bubble’ in passive investing, says investor made famous by ‘Big Short’
https://www.marketwatch.com/story/bubbl ... 2019-08-28
Michael Burry shot to fame and fortune by betting against mortgage securities before the 2008 crisis, a trade immortalized in “The Big Short.”
Now, Burry sees another contrarian opportunity emerging from what he calls the “bubble” in passive investment. As money pours into exchange-traded funds and other index-tracking products that skew toward big companies, Burry says smaller value stocks are being unduly neglected around the world.
In the past three weeks, his Scion Asset Management has disclosed major stakes in at least four small-cap companies in the U.S. and South Korea, taking an activist approach at three of them.
“The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally,” Burry, whose Cupertino, California-based firm oversees about $343 million, wrote in an emailed response to questions from Bloomberg News.
Active money managers have bled assets in recent years as investors rebelled against high fees and disappointing returns -- a trend that prompted Moody’s Investors Service to predict that index funds will overtake active management in the U.S. by 2021. The shift has coincided with a multiyear stretch of underperformance by value stocks and, more recently, by small-caps.
columbia
Posts: 2933
Joined: Tue Aug 27, 2013 5:30 am

Re: Passive investing now controls nearly half the US stock market

Post by columbia »

Gennady Velichkin, the general manager of the Metallurg Magnitogorsk hockey team, uttered the phrase “pure sports terrorism”, when Evgeni Malkin left Russia (via Finland) to play in the NHL.

I’m waiting for one of active firms to describe indexing as “pure investing terrorism.” :beer
bgf
Posts: 1534
Joined: Fri Nov 10, 2017 9:35 am

Re: Passive investing now controls nearly half the US stock market

Post by bgf »

I dont understand. Of the individual stocks I own, most of the shares are "passively" held, ie, they are held long term and not traded. doesnt seem to have been a problem all these years.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: Passive investing now controls nearly half the US stock market

Post by CoastalWinds »

So it seems that indexing continues to grow in popularity. What are the financial risks (if any) to us BH Indexers if the % of Index investments continues to grow? Would it be bad for investors if the entire industry was passive/index mutual funds and ETFs?
Wakefield1
Posts: 1059
Joined: Mon Nov 14, 2016 10:10 pm

Re: Passive investing now controls nearly half the US stock market

Post by Wakefield1 »

"passively managed" as defined by the article: does it include the broad index based ETFs which are possibly being traded very actively and possibly driving some of the day to day volatile price movements in the S&P 500 ?
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Passive investing now controls nearly half the US stock market

Post by Phineas J. Whoopee »

CoastalWinds wrote: Thu Aug 29, 2019 6:42 pm So it seems that indexing continues to grow in popularity. What are the financial risks (if any) to us BH Indexers if the % of Index investments continues to grow? Would it be bad for investors if the entire industry was passive/index mutual funds and ETFs?
It's important to note that mutual funds for individual investors are far less than half the market. The scare stories try to pretend there are no institutional investors picking individual stocks.

To put it another way, the croupiers are just trying to scare ya so you'll tip 'em more.

What if everybody indexed?

PJW
Last edited by Phineas J. Whoopee on Thu Aug 29, 2019 7:20 pm, edited 1 time in total.
Wakefield1
Posts: 1059
Joined: Mon Nov 14, 2016 10:10 pm

Re: Passive investing now controls nearly half the US stock market

Post by Wakefield1 »

When Michael Burry talks,maybe people should listen.
Did Larry Swedroe have a similar observation mentioned in a thread on here in the last few days? (Small value getting comparatively cheaper because of the popularity of big caps/cap weighted indexing?
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Passive investing now controls nearly half the US stock market

Post by Phineas J. Whoopee »

Wakefield1 wrote: Thu Aug 29, 2019 7:18 pm When Michael Burry talks,maybe people should listen.
Did Larry Swedroe have a similar observation mentioned in a thread on here in the last few days? (Small value getting comparatively cheaper because of the popularity of big caps/cap weighted indexing?
Cap-weighted indexing is neutral with respect to the market. To outperform the market one must deviate from it, but that also exposes one to the risk of underperformance.

There exists no way for the total market to outperform itself.

PJW
clown
Posts: 214
Joined: Sun Jan 03, 2016 2:04 am

Re: Passive investing now controls nearly half the US stock market

Post by clown »

TJSI wrote: Tue Mar 19, 2019 7:58 pm :oops: Surely each company in the S&P 500 has some knowledge of who their stock owners are.
I think that Company X would know that Vanguard, for example, owns Z number of shares but NOT how many of Z are in funds versus how many in individual accounts. Individual shareholders own their shares in broker street names nowadays. Virtually nobody gets stock certificates any more.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

Re: Passive investing now controls nearly half the US stock market

Post by Phineas J. Whoopee »

clown wrote: Thu Aug 29, 2019 7:43 pm
TJSI wrote: Tue Mar 19, 2019 7:58 pm :oops: Surely each company in the S&P 500 has some knowledge of who their stock owners are.
I think that Company X would know that Vanguard, for example, owns Z number of shares but NOT how many of Z are in funds versus how many in individual accounts. Individual shareholders own their shares in broker street names nowadays. Virtually nobody gets stock certificates any more.
Every owner of 5% or more of a corporation's outstanding stock must report the fact quarterly to the SEC, and the records are public.

PJW
Wakefield1
Posts: 1059
Joined: Mon Nov 14, 2016 10:10 pm

Re: Passive investing now controls nearly half the US stock market

Post by Wakefield1 »

A lot of indexers still hold S&P 500 or other large cap index funds or ETFs that neglect the smaller cap companies? (Not "Total Stock Market")?

Not an index bubble but a large cap index bubble as compared with total index or small cap index?
Harder for a small fund house to operate a true total stock index fund as compared to large cap index fund?
Some employer provided tax deferred plans only offer the S&P 500 index type fund and not something like Vanguard Total Stock Market?

Upon thinking about it,if there is a large cap bubble or at least price premium as compared to small cap it is probably active investors and fund managers rather than indexing that is driving it.
Last edited by Wakefield1 on Thu Aug 29, 2019 8:46 pm, edited 2 times in total.
kevinpet
Posts: 86
Joined: Fri Jan 13, 2012 1:27 pm
Location: CA
Contact:

Re: Passive investing now controls nearly half the US stock market

Post by kevinpet »

klaus14 wrote: Tue Mar 19, 2019 2:09 pm My guess is problems will start manifesting as large tracking errors.
Let's say, 98% is passive. In this case 2 active traders will make a trade and 98 passive will try to follow it. They will overshoot & undershoot. Lots of tracking error.
Passive doesn't need to do anything to follow the market. If you're tracking the market and the market moves, you're still tracking the market.
Now most of the market is not participating in price discovery. Price discovery is expensive and we passive investors are basically free riding. Less money spent on price discovery means prices are less correct. I think we already started seeing the effects of this. There are probably a greater number of significantly mispriced stocks compared to 5 years ago.
I'll worry when spreads start going up. This is self correcting in a massive way. If there really are fewer people doing price discovery, then there is more profit available for those who do.
GAAP
Posts: 1138
Joined: Fri Apr 08, 2016 12:41 pm

Re: Passive investing now controls nearly half the US stock market

Post by GAAP »

It's 45% now -- but what happens after the next market crash? My guess is it goes down as Joe Average Investor bails out...

In any case, it's one of those interesting but useless statistics.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
Post Reply