Index Funds Bubble? [Michael Burry article]

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The Big short -Michael Burry’s comments about indexing

Post by Santhony511 » Wed Sep 04, 2019 4:48 pm

Did anyone read the article in Bloomberg where Michael Burry , known for the Big short is calling indexing a big bubble ? Would love to hear an expert opinion

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Re: Index Funds Bubble? [Michael Burry article]

Post by packer16 » Wed Sep 04, 2019 4:54 pm

This is one of the shortfalls of concentrated ownership, they can be lobbied by groups who do not represent the views of the fund holders. IMO at some point the cost savings which are pretty small at a certain scale may not be worth the ability of some to lobby the fiduciaries to implement their agenda.

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Re: Index Funds Bubble?

Post by nisiprius » Wed Sep 04, 2019 5:07 pm

cheezit wrote:
Wed Sep 04, 2019 4:09 pm
nisiprius, did you read the linked article? What Forester is saying is that those who broadly support the politics pushed in ESG funds will not be satisfied with the use of ESG funds to further these goals, and they instead will exert pressure on Vanguard (and Blackrock, and Fido, and Schwab, and so on) to use the proxy voting power of their non-ESG funds to these [ESG] ends. Forester presents Vanguard's current actions - per the article, using their proxy voting power of non-ESG funds to pressure companies to modify the makeup of their boards of directors per ESG guidelines - as evidence this is already happening and is likely to happen more in the future.
Yes, I get it that Forester and you do not like ESG. But neither of you make any connection between that and claims that existing index funds are a bubble, or have created a bubble. [Retracted, see below]

I do not see the connection between Vanguard trying to influence corporate governance through voting its stock shares, and claims that index funds are a bubble, or have created bubble.

Nor does it affect the basic arithmetic, whereby buying a broad market index fund does not changing the composition of the stocks not held by the index fund. Whatever the fund company may be urging corporate management to do, an index fund still has to track its index.

In theory, an S&P 500 fund could try to track the S&P 500 index by sampling, and emphasize ESG in the stocks it chooses to sample--dropping companies with poor ESG and substituting stocks with similar characteristics. I don't think it would work very well, and I don't think there's been even a whisper of Vanguard trying to do such a thing.

Similarly, in theory Vanguard could say "the Total Stock Market Index Fund is now going to be renamed the Total Stock Market Social Index Fund and track an ESG index"--just as the "Gold and Precious Minerals Fund" is now the "Global Capital Cycles Fund." It could say "tough, it's an ESG fund now, like it or lump it." Do you really believe Vanguard is about to do that?

Vanguard using its voting rights to influence corporate governance may be a legitimate concern, but it has nothing to do with any claimed "index funds bubble."
Last edited by nisiprius on Wed Sep 04, 2019 7:08 pm, edited 2 times in total.
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Re: Index Funds Bubble? [Michael Burry article]

Post by illumination » Wed Sep 04, 2019 5:16 pm

I didn't find his reasons convincing at all.

And while I'm sure Michael Burry is FAR more knowledgeable than I am on investment markets, the idea that because this guy figured out the subprime mortgage market was a bubble doesn't exactly make him a genius in my book. I remember EVERYONE knowing it was completely nuts and going to blow up. I had a friend who was a personal trainer making about $50k a year that had a multimillion dollar real estate empire. It was very obvious to even those of us that didn't run a hedge fund.

If I told you cryptocurrencies were a bubble and most of them did eventually crash, would you think I was right about everything and could predict the future?

I wouldn't let any of this scare me away from indexing.

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Re: Index Funds Bubble?

Post by cheezit » Wed Sep 04, 2019 6:21 pm

nisiprius wrote:
Wed Sep 04, 2019 5:07 pm
cheezit wrote:
Wed Sep 04, 2019 4:09 pm
nisiprius, did you read the linked article? What Forester is saying is that those who broadly support the politics pushed in ESG funds will not be satisfied with the use of ESG funds to further these goals, and they instead will exert pressure on Vanguard (and Blackrock, and Fido, and Schwab, and so on) to use the proxy voting power of their non-ESG funds to these [ESG] ends. Forester presents Vanguard's current actions - per the article, using their proxy voting power of non-ESG funds to pressure companies to modify the makeup of their boards of directors per ESG guidelines - as evidence this is already happening and is likely to happen more in the future.
Yes, I get it that Forester and you do not like ESG. But neither of you make any connection between that and claims that existing index funds are a bubble, or have created a bubble.

[...]

Vanguard using its voting rights to influence corporate governance may be a legitimate concern, but it has nothing to do with any claimed "index funds bubble."
I think we are all talking past each other, here. Neither Forester (unless I was misunderstanding him) nor I claimed anything about an index funds bubble. While I can't read Forester's mind, my guess is that's probably why he prefaced his remarks that started this tangent by saying "the real issue might be governance" (emphasis added) - a view, incidentally, that was shared by Jack Bogle. For the record, I personally don't see how an "index funds bubble" is possible so long as indices remain cap-weighted and a decent number of active traders exist to facilitate price discovery. While automatic investment might inflate the P/E of the market as a whole, that effect would still happen even if all mutual funds were actively managed.

Furthermore, unless I am misreading your words, you seem to claim that I am against ESG funds. I have no problem with them nor with the people that buy them - I just don't want non-ESG funds that I own to use their proxy voting power to fulfill the policy goals of ESG funds.

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'Big Short' investor Michael Burry is calling passive investment a 'bubble.'

Post by beth1708 » Wed Sep 04, 2019 7:03 pm

[Post merged into here, see below. --admin LadyGeek]
Michael Burry, the investor that famously shorted mortgage securities before the 2008 housing crisis, told Bloomberg on Wednesday that he sees a "bubble" in passive investing.

That bubble is ignoring small-cap stocks, said Burry, who was a key figure in Michael Lewis' bestselling book "The Big Short" and was played by Christian Bale in the movie with the same name. The problem is happening because the pillars of passive investing - exchange-traded funds and index-based assets- mostly focus on bigger companies. This puts downward pressure on the stocks of smaller companies and has effectively "orphaned smaller value-type securities globally," he wrote to Bloomberg in an email.
https://markets.businessinsider.com/new ... 1028485512

I'm not seeing the logic here. I can see that if the market as a whole goes down, then index funds will too, but that doesn't make a more focused portfolio more likely to be good, unless one is (of course) lucky.

Anyone want to offer a reason to believe him? I'm not seeing index funds, per se, as analogous to the mortgage crisis. The market as a whole, could be, but not index funds in particular. [And then there is the follow the money idea, Cui bono?]

Thanks, Beth

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Re: Index Funds Bubble?

Post by nisiprius » Wed Sep 04, 2019 7:08 pm

cheezit wrote:
Wed Sep 04, 2019 6:21 pm
...unless I am misreading your words, you seem to claim that I am against ESG funds...
I apologize, and I have edited my posting to retract that claim.
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The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs

Post by beachretirement » Wed Sep 04, 2019 7:09 pm

[Thread merged into here, see below. --admin LadyGeek]

https://www.bloomberg.com/news/articles ... prime-cdos

Read this article today. Curious to hear thoughts from readers. While I agree the lack of liquidity can cause short term volatility, I fail to see why passive investing in an index can potentially cause a bubble. Thanks!

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Re: The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs

Post by fabdog » Wed Sep 04, 2019 7:12 pm

use the search box... multiple threads on this article so far today

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Re: The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs

Post by eye.surgeon » Wed Sep 04, 2019 7:14 pm

Imagine that, a fund manager that doesn't like index funds.
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Re: Index Funds Bubble? [Michael Burry article]

Post by LadyGeek » Wed Sep 04, 2019 7:21 pm

I merged beachretirement's thread and beth1708's post into the on-going discussion.

beth1708, Welcome!
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Re: Index Funds Bubble? [Michael Burry article]

Post by Ki_poorrichard » Wed Sep 04, 2019 8:20 pm

Everyone most likely may have incentives to why. I don’t know the underlying reason and it may or may not be what you think. Dr. Burry gives valid points to why he thinks it so.

Is is that unreasonable to think that the majority may be invested in indexing vehicles that migrate to a large cap weighting exposure and that exiting these vehicles when its time has not changed thus far? Time will tell, in 10 to 20 years or maybe sooner, then we will all know the final outcome to this.

Academics require funding to do their research and it’s not unimaginable that it may have influence on what is taught. Active managers get paid to make a living just like everyone else and some may exploit it on investors who know no better.

Why doesn’t Warren Buffett invest his own money in the S&P 500 index fund like he recommends? Why does Vanguard have more actively managed mutual funds than index funds in their line-up?

What I’m trying to get at is this. I decided to keep an open mind on both indexing and the active side of investing. I believe both to have it’s pros and cons.

It’s that simple and I believe its your own responsibility to do your due diligence in finding the answers in order to grow as an investor. Confirmation bias can be easy to get warped into either way or both sides of the camp.

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Re: Index Funds Bubble? [Michael Burry article]

Post by bluquark » Wed Sep 04, 2019 8:31 pm

Burry's liquidity argument rings true, but I don't see anything to worry about as a long-term buy-and-hold investor. The underlying business reality shouldn't change as a result of these superficial market dynamics so prices should get back to normal by the time I'm ready to withdraw in retirement. Also, my bonds are there to smooth over the sequence of returns, covering many scenarios including this one.

However, if I were holding a derivative-based "alt" like a long/short fund or a variance risk premium fund, then I'd be at risk of permanent loss from this type of effect and I'd worry about this argument. I take Burry to be saying not that "index funds are bad for retirement investors" but "index funds are making the market more brittle and may cause systemic short/medium-term problems for active trading strategies".

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Re: Index Funds Bubble? [Michael Burry article]

Post by Forester » Wed Sep 04, 2019 8:40 pm

I am neutral on ESG; it's a positive thing if these products help to make young people more invested in the process.

My concern is that Vanguard, Blackrock, will be used as blunt tools to further agendas. The first pressure is external, then the second pressure is from within; if I am Blackrock for example, I can get the jump on Vanguard by folding to external pressure groups, and at the same time make a PR virtue of the fact. In this instance Vanguard follow suit and accede to the demands, whatever they are, but look slow-footed.

One can easily imagine a public outrage which leads to demands for a particular industry group to be omitted from the regular market index. ESG won't be good enough - there should be a Sin Index for a few bad companies. Maybe Vanguard/Blackrock don't give in the first time, but the pressure will return again and again.

From the POV of an investor making money this doesn't really matter, but there will be more unaccountable private sector governance of the kind we're already beginning to see from Silicon Valley.

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Re: The Big Short's Michael Burry on why index funds are like subprime CDOs - why is he wrong?

Post by PD71 » Wed Sep 04, 2019 9:17 pm

KnowNth wrote:
Wed Sep 04, 2019 3:07 pm
That's not true.

Take an extreme case. Say a company is about to be de-listed from the index. Active fund can sell this company beforehand through market research, thus avoid the bleeding. Index fund can't.
9-5 Suited wrote:
Wed Sep 04, 2019 2:31 pm

Index investing punishes bad companies to the exact degree that the active community punishes them. There's nothing special about the choices made by index investing that aren't already being made by the market at large. Any exploitation opportunities that exist come at the expense of some other active investor.
This is the fundamental debate isn't about active vs. passive investing - that active managers think they can beat the market by doing this sell on time vs. passive funds will not. However, numerous research reports and several Bogle books have done analysis of active mutual funds and proven that less than 10% survive really long term and even lesser beat the markets.

I like the way it was said in one of the books I read about indexing. Indexing strategy helps to cull the bad companies which are then replaced by better companies. So the natural process of elimination survival of the fittest as a whole is far better than someone picking those companies for me and just maybe getting it wrong a few times.

If you agree and are happy with getting market returns (sans 0.0x% fees) with indexing then there is real argument to be made here.

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Re: Index Funds Bubble? [Michael Burry article]

Post by PD71 » Wed Sep 04, 2019 9:41 pm

I also read this blog recently so thought I'd post here. I'm not saying Michael Burry is wrong or right. He's an active investor as you can see from this interview. And active investors like to be in control. https://www.valuewalk.com/2017/03/fasci ... -strategy/

If anything, we need to also see if he's able to pull of this kind of miracle as he did in 2008 crisis. If he does "power to him". However, for most people this is not an option and indexing with market returns is probably the best approach.

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Re: Index Funds Bubble? [Michael Burry article]

Post by rascott » Wed Sep 04, 2019 11:38 pm

I do think he is correct. The idea of using passive index investing is no less a Quant model than one that says that factor investing is a good idea.

It's based on a pretty small window of when individuals could actually do it. Index funds are still in their childhood years. Their superiority is based upon a very short time frame.

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Re: Forbes: The Bubble That Is The S&P 500 Index

Post by Cloud » Thu Sep 05, 2019 5:04 am

More click bait.
Bloomberg: The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs.
https://www.bloomberg.com/news/articles ... prime-cdos

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Re: Index Funds Bubble? [Michael Burry article]

Post by guyinlaw » Thu Sep 05, 2019 9:10 am

Unemployment rate at 3.7%, Inflation is at 1.8%, stock market near 10 year high. Market is expecting another 0.5% interest rate cut from the Fed.

So who is to blame for the bubble?

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Everyone here has misunderstood the Michael Burry article

Post by jdilla1107 » Thu Sep 05, 2019 9:20 am

[Merged here -- moderator oldcomputerguy]

There is a long thread here: viewtopic.php?f=10&t=289284 about Michael Burry's statements with regards to an index fund bubble and comparing index funds to CDOs. I think almost everyone here has entirely missed his point. I thought explaining it would be educational.

Michael Burry is not saying that a fund like Vanguard's TSM has a fundamental problem. In his view, the problem is all of the side bets that are happening based on the value of the index, which many people do not know about. At the CME, you can buy a futures contract that is simply a highly leveraged bet on whatever the index value is at the end of the day. No actual securities trade hands. It's a "financially settled" contract, which means only dollars change hands. This is very much like how a CDO was a bet against something that other people were engaged in. To take it one step further, you can also buy options against the futures, which is now a side bet placed on a side bet. And as you can imagine, banks and financial companies are inventing new contracts for new behaviors. (swaps on index values)

What does it mean if the daily volume in a security is X, but the daily volume on the side bets of that security is 10x or 100x?

Here is the CME future for the small cap index:

https://www.cmegroup.com/trading/equity ... e=20190904

Around 15 Billion dollars in notional volume of Russell 2000 contracts are being traded every day. This dwarfs what is really happening in many small caps stocks.

His point about "everyone rushing towards the exists" is about when these side bets need to be made whole in some sort of liquidity crisis. Also, realize that sometimes funds partially use derivatives instead of holding the actual securities.

So, I think there are two actionable moves to make based on his belief:

- Hold real securities. (stock funds, bond funds, stocks, bonds)
- Check your funds to make sure that they are not highly leveraged with derivatives instead of holding real securities. (Major funds from major players usually don't have this problem.)

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Re: Everyone here has misunderstood the Michael Burry article

Post by firebirdparts » Thu Sep 05, 2019 9:38 am

I don't know 1% of what he knows about the CME. However, I would think there is no method for options trading to suddenly be yanked into a new reality in the same way that CDO's were in 2008. Moody's had to put credit ratings on those instruments, and when they realized they were wrong, they basically condemned the building overnight. That would have been uncomfortable by itself, but it turned out that several people had the building insured. With credit default swaps, the cost of the swap is based on the perceived likelihood of default. If you get that number wrong, you're in a lot of trouble. If you get it right, and a lot of them default, you're in a lot of trouble. No insurance company can bail out debts of this size, and they should have known that before they got into the business. Greenspan pointed out that the desire for survival was a lot weaker than he thought. Messing that up took lots of lazy people just doing a poor job in the office.

With the CME, I think it's a zero sum game and everybody playing knows that. I might be wrong about that, though.

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Re: Everyone here has misunderstood the Michael Burry article

Post by jdilla1107 » Thu Sep 05, 2019 9:48 am

firebirdparts wrote:
Thu Sep 05, 2019 9:38 am
With the CME, I think it's a zero sum game and everybody playing knows that. I might be wrong about that, though.
But, the zero sum game only works if the losers are willing and able to keep paying the winners. If you jolt the system hard enough and the losers go out of business, you are in liquidity crisis mode. While the CME tries very hard to protect against this and even make a guarantee themselves, you could imagine a jolt that the CME could not absorb. It will be obvious to everyone, after the fact, if it ever happens.

The CME's sp500 contract has only existed since 1982, before indexing was very popular. The Russell 2000 in 2001. In this way, we are in uncharted waters.

The problem also extends to custom contracts not traded or enforced by any exchange as well. (Private party contracts.)

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Re: Everyone here has misunderstood the Michael Burry article

Post by nisiprius » Thu Sep 05, 2019 10:50 am

I thank you sincerely for the insight.

But I think it's more complicated than that. He's saying something complicated, maybe several complicated things, in a muddled way. It's hard not to read his complaints about "There is all this opportunity, but so few active managers looking to take advantage," and "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" as being complaints about passive investing itself.

This is in addition to complaints about highly active and leveraged investments, and side bets, that have been made possible as a result of vehicles created to support passive investing.

As for
Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day,
I am not sure what to say. A quick glance at the semiannual report for the Vanguard Total Stock Market Index Fund shows (thousands of dollars):

Total Common Stocks $810,134,218
Total Temporary Cash Investments $7,124,658
Other Assets and Liabilities--Net -0.4% (3,173,333)

I'm assuming that all use of "derivatives" and/or securities lending or what have you falls under "other assets and liabilities" constituting -0.4% of the portfolio. Where are the "pseudo-match flows" that will be "impossible to unwind?"

If I intentionally choose a ridiculously narrow ETF from a non-Vanguard company, ESPO, the VanEck Vectors Video Gaming and eSports ETF, I see this. (These are dollars, not thousands!)

Image

As with Vanguard, the vast majority of the dollars in this fund seem to be just where you'd think--in actual stock purchases--and only a seemingly-negligible amount--like Vanguard, negative--in "Other/Cash."

It looks to me as if these two funds pretty much just go out and buy and sell their underlying securities, the way I've always assumed they do.

So, clearly (seriously of course, I'm not kidding) I don't have a clue as to what he's talking about, but he is apparently not talking about "funds" or ETFs as I know them.

(Certainly one can fault the financial press for taking a complicated message about products an ordinary retail investor doesn't know about, and reporting it in a way that sounds if he's saying S&P 500 index funds are ruining the world.)

Which are the funds and vehicles that "pseudo-match flows" rather than just simply going out and buying and selling securities?
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Re: Everyone here has misunderstood the Michael Burry article

Post by Ping Pong » Thu Sep 05, 2019 11:15 am

What do index futures have to do with passive investing though? The indexes existed long before index funds did. And index futures can exist even if index funds didn’t exist.

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Re: Everyone here has misunderstood the Michael Burry article

Post by petulant » Thu Sep 05, 2019 11:19 am

nisiprius wrote:
Thu Sep 05, 2019 10:50 am
I thank you sincerely for the insight.

But I think it's more complicated than that. He's saying something complicated, maybe several complicated things, in a muddled way. It's hard not to read his complaints about "There is all this opportunity, but so few active managers looking to take advantage," and "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" as being complaints about passive investing itself.

This is in addition to complaints about highly active and leveraged investments, and side bets, that have been made possible as a result of vehicles created to support passive investing.

As for
Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day,
I am not sure what to say. A quick glance at the semiannual report for the Vanguard Total Stock Market Index Fund shows (thousands of dollars):

Total Common Stocks $810,134,218
Total Temporary Cash Investments $7,124,658
Other Assets and Liabilities--Net -0.4% (3,173,333)

I'm assuming that all use of "derivatives" and/or securities lending or what have you falls under "other assets and liabilities" constituting -0.4% of the portfolio. Where are the "pseudo-match flows" that will be "impossible to unwind?"

If I intentionally choose a ridiculously narrow ETF from a non-Vanguard company, ESPO, the VanEck Vectors Video Gaming and eSports ETF, I see this. (These are dollars, not thousands!)

Image

As with Vanguard, the vast majority of the dollars in this fund seem to be just where you'd think--in actual stock purchases--and only a seemingly-negligible amount--like Vanguard, negative--in "Other/Cash."

It looks to me as if these two funds pretty much just go out and buy and sell their underlying securities, the way I've always assumed they do.

So, clearly (seriously of course, I'm not kidding) I don't have a clue as to what he's talking about, but he is apparently not talking about "funds" or ETFs as I know them.

(Certainly one can fault the financial press for taking a complicated message about products an ordinary retail investor doesn't know about, and reporting it in a way that sounds if he's saying S&P 500 index funds are ruining the world.)

Which are the funds and vehicles that "pseudo-match flows" rather than just simply going out and buying and selling securities?
As another example, the iShares S&P 500 ETF has net assets of approximately $183 billion. Its holdings show an exposure to S&P 500 E-mini contracts for September with a notional value of $712 million. That is a significant sum but slightly less than 0.4% of net asset value.

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Re: Everyone here has misunderstood the Michael Burry article

Post by Big Dog » Thu Sep 05, 2019 11:26 am

Ping Pong wrote:
Thu Sep 05, 2019 11:15 am
What do index futures have to do with passive investing though? The indexes existed long before index funds did. And index futures can exist even if index funds didn’t exist.
Exactly.

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Re: Everyone here has misunderstood the Michael Burry article

Post by jdilla1107 » Thu Sep 05, 2019 11:33 am

nisiprius wrote:
Thu Sep 05, 2019 10:50 am

If I intentionally choose a ridiculously narrow ETF from a non-Vanguard company, ESPO, the VanEck Vectors Video Gaming and eSports ETF, I see this. (These are dollars, not thousands!)
Here is an image pulled from the Direxion Prospectus with is a large provider of leveraged ETFs:

Image

That's some crazy stuff all based on indexes and all available to average investors. The financial market is starting to apply the word "index" to things in a sort of marketing bubble. (I laughed when I saw the word "cash" with an asterisk.)

I get that he wasn't being very specific or clear in the article, but he's likely drumming up business for his fund and simultaneously doesn't want to be sued for libel.

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Re: Everyone here has misunderstood the Michael Burry article

Post by jdilla1107 » Thu Sep 05, 2019 11:51 am

Big Dog wrote:
Thu Sep 05, 2019 11:26 am
Ping Pong wrote:
Thu Sep 05, 2019 11:15 am
What do index futures have to do with passive investing though? The indexes existed long before index funds did. And index futures can exist even if index funds didn’t exist.
Exactly.
What did CDOs have to do with passive investing? Nothing. They were only responsible for one the most massive liquidity crises in our life times.

The point is not that "You shouldn't hold Vanguard Index funds". The point is that everyone is treating the index values as something that is appropriate to base 5th level derivatives against. Everyone thinks they are hedged against something else. Everyone thinks their positions are well understood. Everyone thinks the small cap to large cap relationship is well understood and can be traded against. When the indexes start to just become "numbers that you can lean on", there could be a problem. An index is just a number. It's what you do with the index value that could be a problem.

I am only trying to explain the perspective and I think I am done defending it. I personally would not hold investments which hold large amounts of derivatives though.
Last edited by jdilla1107 on Thu Sep 05, 2019 12:03 pm, edited 3 times in total.

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Re: Everyone here has misunderstood the Michael Burry article

Post by nisiprius » Thu Sep 05, 2019 11:52 am

jdilla1107 wrote:
Thu Sep 05, 2019 11:33 am
nisiprius wrote:
Thu Sep 05, 2019 10:50 am

If I intentionally choose a ridiculously narrow ETF from a non-Vanguard company, ESPO, the VanEck Vectors Video Gaming and eSports ETF, I see this. (These are dollars, not thousands!)
I'm not sure you tried hard enough. :D Here is an image pulled from the Direxion Prospectus with is a large provider of leveraged ETFs:...
Of course. Actually I had toyed with the idea of looking up the Wisdomtree 90/60 Balanced Fund, NTSX. But I don't think anyone is claiming there's a dangerous bubble in inverse and leveraged ETFs that's going to bring down the financial system. I'm guessing the Proshares 2X S&P ETF, SSO might be one of the bigger ones, total assets $2.2 billion. UBT, the 2X Treasury ETF, which might have been mentioned by some people in the forum, only has $34 million in assets. Would you care to hazard a guess--maybe you can even find out--what the total amount of assets in every leveraged and inverse ETF is? I'm thinking maybe $20 billion?

I also have noticed the increasing number of mutual funds that are using derivatives in order to effectively create short and leveraged positions. Indeed, I keep thinking that the obvious intent of the Investment Company Act of 1940 was to keep (actual) leverage strictly in check, and that these funds are making an end-run by using derivatives. But does it really amount to a big chunk of the mutual fund and ETF market, collectively?

I have another question but I think I'll post it as a separate thread...
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Re: Everyone here has misunderstood the Michael Burry article

Post by jdilla1107 » Thu Sep 05, 2019 12:01 pm

nisiprius wrote:
Thu Sep 05, 2019 11:52 am
But I don't think anyone is claiming there's a dangerous bubble in inverse and leveraged ETFs that's going to bring down the financial system. I'm guessing the Proshares 2X S&P ETF, SSO might be one of the bigger ones, total assets $2.2 billion. UBT, the 2X Treasury ETF, which might have been mentioned by some people in the forum, only has $34 million in assets. Would you care to hazard a guess--maybe you can even find out--what the total amount of assets in every leveraged and inverse ETF is? I'm thinking maybe $20 billion?
The leveraged ETFs were just an example that is representative of what is going on behind the scenes. The leveraged ETFs are a symptom of the problem. It's not the individual investor interest in leveraged ETFs is the problem, it's that the same kind of thing is going on between JP Morgan and Bank of America with massive positions that are not being carried out against the actual securities.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Ki_poorrichard » Thu Sep 05, 2019 12:31 pm

guyinlaw wrote:
Thu Sep 05, 2019 9:10 am
Unemployment rate at 3.7%, Inflation is at 1.8%, stock market near 10 year high. Market is expecting another 0.5% interest rate cut from the Fed.

So who is to blame for the bubble?
+1

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Re: Everyone here has misunderstood the Michael Burry article

Post by hornet96 » Thu Sep 05, 2019 12:40 pm

jdilla1107 wrote:
Thu Sep 05, 2019 9:20 am

There is a long thread here: viewtopic.php?f=10&t=289284 about Michael Burry's statements with regards to an index fund bubble and comparing index funds to CDOs. I think almost everyone here has entirely missed his point. I thought explaining it would be educational.
I understand his point, and still disagree with it. The difference in trading CDOs vs. standardized futures contracts facilitated through a central clearinghouse should be fairly obvious, but I'll say it anyway: Both the CDO itself and its underlying (slices of pooled mortgages) were by their very nature far less liquid that that of equity futures contracts and their underlying (listed equities). Additionally, the value (pricing) of CDOs was fundamentally driven based on assumed credit risk (including the credit risk of credit default swap providers), which we now know was essentially a farce and led to the 2008 financial crisis. Finally, the liquidity of CDOs was almost entirely dependent on the large investment banks serving as secondary market makers for those instruments.

For Mr. Burry's claim to have any merit, it needs to be demonstrated that equity futures contracts or their underlying (listed equities) can or will suffer from the same kind of distorted pricing resulting from faulty credit profiles of the underlying and a lack of liquidity provided by the central clearinghouses. The existence of leverage in standardized futures contracts does not in-and-of itself prove his point.

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Re: Index Funds Bubble? [Michael Burry article]

Post by flossmoor » Thu Sep 05, 2019 1:09 pm

Michael Burry was right that the synthetic CDO derivatives/whatever the hell "investments" of 10+ years ago were total crap.

The stocks comprising the S&P 500 or Total Stock Market or similar are NOT crap. They are an IMMENSE wealth-creating ensemble over time.

So his conclusions are not correct.

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Re: Index Funds Bubble? [Michael Burry article]

Post by Ki_poorrichard » Thu Sep 05, 2019 1:11 pm

I’m not thinking too much into it. In my opinion, Dr. Burry is just telling it like it is. The fact of the matter or what I get from it is this. Indexing has become extremely popular and sought after and bought into. When it’s time to exit, it’s literally all the same. I definitely buy into that. No one has to buy into what he is saying.

Just like those who cried wolf before the 2008 debacle. It’s all on record and you can see the video clips online yourself. They were ridiculed and told why they were wrong. Doesn’t hurt to keep an open mind to both sides of the argument.

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Re: Index Funds Bubble? [Michael Burry article]

Post by MikeZ » Fri Sep 06, 2019 9:07 am

To me the test of this hypothesis would be on how companies management is acting. If in fact, index funds were artificially supporting the pricing of companies, you would think that their managements would become less attune hitting certain performance metrics--because who cares if the buyers of their stock don't consider it in their decision.

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The passive investment bubble, a short video from IBKR [Interactive Brokers]

Post by Mindhacker » Fri Sep 06, 2019 9:46 am

[Thread merged into here, see below. --admin LadyGeek]

Today people from IBKR posted an interesting video: https://www.youtube.com/watch?v=MGKV7xbn5nw and i was thinking to the situation where the ETF can be more liquid than the half of the S&P500 for example.

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Re: The passive investment bubble, a short video from IBKR

Post by unclescrooge » Fri Sep 06, 2019 10:23 am

His more thoughtful, guarded response isn't good for the news outlets. That's why Bloomberg did not link to it, and only 12 people have watched it. :mrgreen:

In order to get publicity, you need to make outlandish claims.

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Re: Index Funds Bubble?

Post by JoMoney » Fri Sep 06, 2019 10:35 am

nisiprius wrote:
Wed Aug 28, 2019 6:41 pm
The researchers:
We then extrapolate from past trends to estimate the future growth of the Big Three. We estimate that the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two decades.
Somehow, in the MarketWatch article,

"as much as 40%" turned into "half," and
"within two decades" turned into "soon."

I can't read the full paper without paying $5 which I don't want to do, but I wonder about this, too:
The “Big Three” now hold an average stake of more than 20% of companies in the S&P 500, the authors say.
There's something odd about that, because using data from the 2019 ICI Factbook, index funds hold (by dollar weight) 29% of the stocks in mutual funds, and mutual funds own 30% of all US stocks, so I calculated that index funds hold 29% of 30% = 8.7% of US stocks--that's pretty far from 20%. I think they must be using some non-obvious definition of "average stake."

As for "we then extrapolate from past trends," remember how Mark Twain "proved" that "seven hundred and forty-two years from now the Lower Mississippi will be only a mile and three-quarters long" (extrapolating from the rate at which the river was shortening itself through cutoffs).
Those numbers definitely look fishy. Even your estimation looks slightly higher than what is reported as major holders of these companies (and not all of those institutions holdings are index funds)... which is required to be reported information. Since most index funds are held at market-cap weights, you would think the holdings info would be roughly proportional all the way down, with some slight variations since the management companies also have non-index funds, and some companies have ownership that isn't part of the "free float" in the market... there's also a point to be made that "The Big Three" have lots of funds that ARE NOT INDEX FUNDS

The reported institutional holders data for MSFT as of June 29, 2019:
Vanguard Group, Inc. (The) 8.03%
Blackrock Inc. 6.62
Street Corporation 4.10%


8.03 + 6.62 + 4.1 = 18.75%

The reported institutional holders data for AAPL shows as of June 29, 2019:
Vanguard Group, Inc. (The) 7.42%
Blackrock Inc. 6.23%

Berkshire Hathaway, Inc 5.52%
State Street Corporation 4.14%

7.42 + 6.23 + 4.14 = 17.79%

The reported institutional holders data for AMZN shows as of June 29, 2019:
Vanguard Group, Inc. (The) 6.33%
Blackrock Inc. 5.27%

FMR, LLC 3.38%
Street Corporation 3.35%

6.33 + 5.27 + 3.35 = 14.95%


FWIW, I was able to look at some info from what I believe is the paper, for free, by going here
https://papers.ssrn.com/sol3/papers.cfm ... id=3385501
and choosing the "Open PDF in Browser" option

I found this bit humorous given your Mark Twain quote:
... To generate such an estimate we begin by estimating the rate at which
equity ownership by investors other than the Big Three has declined over the
past ten years. In 2008, 13.5% of S&P 500 equity was managed by the Big
Three, so 86.5% was not. Ten years later, in 2017, 20.5% of S&P 500 equity
was managed by the Big Three, so 79.5% was not. We calculate that the
decline from 86.5% to 79.5% over ten years reflected an annual rate of
decline of 0.84%. We then ask what would happen if the ownership of shares
by non-Big Three investors (which we refer to as “non-Big-Three holdings”)
continues to decline at this annual rate...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: The passive investment bubble, a short video from IBKR

Post by msk » Fri Sep 06, 2019 10:39 am

Moral of the story: do not panic. Let others panic the SP500 into a free fall and buy cheap. The makings of another Flash Crash... Do NOT use Stop Loss Sell orders for your ETFs. The last Flash Crash was a painful lesson for me personally. Lost $100k in a few minutes on good old stodgy BRK.

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Re: Index Funds Bubble? [Michael Burry article]

Post by apple44 » Fri Sep 06, 2019 10:45 am

Here's an article directly responding to the Michael Burry article:
Debunking the Silly “Passive is a Bubble” Myth
https://awealthofcommonsense.com/2019/0 ... bble-myth/

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Re: The passive investment bubble, a short video from IBKR

Post by JoMoney » Fri Sep 06, 2019 10:52 am

I think the most fallacious part of these recent scare stories, is referring to the potential liquidity problems in ETF's as being associated with "Passive investing".
If you're worried about being able to sell or trade your shares, you're not "passive" investing.
That said, I believe they are right about potential downturns creating vicious cycles and liquidity problems in the smaller more esoteric ETF's.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: The passive investment bubble, a short video from IBKR

Post by Fallible » Fri Sep 06, 2019 11:09 am

Interesting that he immediately made it clear that he would not go as far as Michael Burry did in calling passive investing a "bubble."
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Re: Index Funds Bubble? [Michael Burry article]

Post by LadyGeek » Fri Sep 06, 2019 1:46 pm

I merged Mindhacker's thread into the on-going discussion. The combined thread is in the Investing - Theory, News & General forum.

Mindhacker's thread was posted in the non-US investing forum (Interactive Brokers), but the video is in response to the Michal Burry article.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Re: Index Funds Bubble? [Michael Burry article]

Post by guyinlaw » Fri Sep 06, 2019 3:44 pm

The ETF uses an authorized participant (AP) to form creation units. For an ETF tracking the S&P 500, an AP would form a creation unit of shares in all the S&P 500 companies in a weighting equal to that of the underlying index. The AP would then transfer the creation unit to the ETF provider on an equal NAV value basis. In return, the AP would receive a similarly valued block of shares in the ETF. The AP can then sell those shares in the open market. The creation units are usually anywhere from 25,000 to 600,000 shares of the ETF.

The redemption mechanism helps keep the market and NAV values in line. The AP can easily arbitrage any discrepancies between the market value and the NAV during the course of the trading day. The ETF shares' market value naturally fluctuates during the trading day. If the market value gets too high compared to the NAV, the AP can step in and buy the ETF's underlying constituent components while simultaneously selling ETF shares.

In the alternative, the AP can buy the ETF shares and sell the underlying components if the ETF market value gets too far below the NAV.
These opportunities can provide a quick and relatively risk-free profit for the AP while also keeping the values close together. There may be multiple APs for an ETF, ensuring that more than one party can step into arbitrage away any price discrepancies
In a market sell off there are two steps with ETFs that IMO smooth the drop in prices.(act as buffer)
1. As people sell ETFs its market value drops below the NAV and AP can keep buying a certain number of ETFs before they have to sell underlying component shares.
2. " creation units are usually anywhere from 25,000 to 600,000 shares of the ETF" so APs don't sell underlying components for every share sold.
3. There will be active traders that will buy or sell different components of the index differently that affect the price of the index ETF.

I am not seeing how index funds /ETFs do this differently vs active funds.

One thing that Bogle himself mentioned was the people who buy ETFs are more like renters, likely sell quickly vs if they had owned a index mutual fund.

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Re: Everyone here has misunderstood the Michael Burry article

Post by Vision » Fri Sep 06, 2019 5:30 pm

jdilla1107 wrote:
Thu Sep 05, 2019 9:20 am

- Hold real securities. (stock funds, bond funds, stocks, bonds)
- Check your funds to make sure that they are not highly leveraged with derivatives instead of holding real securities. (Major funds from major players usually don't have this problem.)
What you say seems to make sense.

Would these Vanguard ETFs have this liquidity problem: VT, VXUS, VWRA? Or are those fine?

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Re: The Big Short's Michael Burry on why index funds are like subprime CDOs - why is he wrong?

Post by BigJohn » Fri Sep 06, 2019 5:40 pm

KnowNth wrote:
Wed Sep 04, 2019 2:18 pm
I don't think he is wrong.

Since Index investing doesn't punish the bad companies, doesn't reward the good companies, it creates opportunities for good fund managers to explore. As index funds grow bigger, I would think the opportunities grows bigger.

I imagine eventually he (or someone else) will make a lot of money out of this.
If this were true then as indexing grew, the performance of active fund managers picking stocks would improve. Based on the latest SPIVA report, I see no evidence that this change is happening.

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Re: Index Funds Bubble? [Michael Burry article]

Post by physixfan » Fri Sep 06, 2019 8:05 pm

I think Dr. Burry's opinion deserves some more discussion in depth. I think index fund indeed can possibly be a bubble. Why? What bogleheads is always do is: keeping buying index funds no matter what. Even if the price is already high (whatever this means), people still contribute money into it. If you consider the total inflow into those stocks in SP500 index, the supply/demand is tilted (to some extent). There are constantly huge inflow into them, and not many are selling, so the price can go nowhere but higher. Does the price still reflect the true value of the company? Perhaps, I don't know. If, some day, for example when a lot of people get panic and start to sell index funds, the money inflow turns to outflow, then the liquidity problem mentioned by Dr. Burry may be a big problem. Actually I don't know whether the above argument is true or to what extent, and I think maybe some good related data/charts will be helpful.

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Re: Index Funds Bubble? [Michael Burry article]

Post by bluquark » Fri Sep 06, 2019 8:16 pm

physixfan wrote:
Fri Sep 06, 2019 8:05 pm
I think Dr. Burry's opinion deserves some more discussion in depth. I think index fund indeed can possibly be a bubble. Why? What bogleheads is always do is: keeping buying index funds no matter what. Even if the price is already high (whatever this means), people still contribute money into it. If you consider the total inflow into those stocks in SP500 index, the supply/demand is tilted (to some extent). There are constantly huge inflow into them, and not many are selling, so the price can go nowhere but higher.
Sure, but if so that's a stock market bubble, not an index fund bubble. To be sure, anybody buying Vanguard Total Stock in 1999 was investing into a bubble. But so were the vast majority of active funds and retail investors, few of whom resisted the temptation to buy tech stocks.

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Re: Index Funds Bubble? [Michael Burry article]

Post by columbia » Fri Sep 06, 2019 8:24 pm

bluquark wrote:
Fri Sep 06, 2019 8:16 pm
physixfan wrote:
Fri Sep 06, 2019 8:05 pm
I think Dr. Burry's opinion deserves some more discussion in depth. I think index fund indeed can possibly be a bubble. Why? What bogleheads is always do is: keeping buying index funds no matter what. Even if the price is already high (whatever this means), people still contribute money into it. If you consider the total inflow into those stocks in SP500 index, the supply/demand is tilted (to some extent). There are constantly huge inflow into them, and not many are selling, so the price can go nowhere but higher.
Sure, but if so that's a stock market bubble, not an index fund bubble. To be sure, anybody buying Vanguard Total Stock in 1999 was investing into a bubble. But so were the vast majority of active funds and retail investors, few of whom resisted the temptation to buy tech stocks.
I’m using 1999 as the start date, because that’s what’s being discussed. Let’s assume the “smart” money determined that value stocks were the appropriate response to the “bubble.” How has that worked out since then?
https://www.portfoliovisualizer.com/bac ... 0&total3=0

Large cap has narrowly edged out large cap value.

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Re: Index Funds Bubble? [Michael Burry article]

Post by bluquark » Fri Sep 06, 2019 8:48 pm

columbia wrote:
Fri Sep 06, 2019 8:24 pm
I’m using 1999 as the start date, because that’s what’s being discussed. Let’s assume the “smart” money determined that value stocks were the appropriate response to the “bubble.” How has that worked out since then?
https://www.portfoliovisualizer.com/bac ... 0&total3=0

Large cap has narrowly edged out large cap value.
That just shows that, whatever "value" is (I don't tilt to value because I consider it a largely meaningless mystery meat technical metric), it included tech stocks, or stocks highly correlated with tech stocks. More interestingly, if I switch Portfolio 2 to 10-year treasuries, then treasuries outperformed from 1999 to 2016 with much less volatility, and only since then did the hypothetical patient invest-into-a-bubble Bogleheads finally harvest their risk premium.

People who bought in at the very peak, in 2000, are still waiting.
Last edited by bluquark on Fri Sep 06, 2019 9:06 pm, edited 1 time in total.

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