Is the level of index investing too high?
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Is the level of index investing too high?
Bad title but wasn't sure how else to put it.
As I understand it, at least about 1/3 of the US equity market is made up of index investors. This would be not only index funds, but also "active managers" that use a given index as a baseline and then tweak it from there. Additionally, there are direct indexers that match their portfolios to a given index, just not through an index fund.
My question, is does this lead to the tale wagging the dog? My poor understanding of BH philosophy is that the market knows more collectively than anyone knows individually. In essence, an index is "crowd sourcing" the market. Is the high percentage of the market that is passively following an index skewing this? If so, does this mean that a total market index in 2025 is less "smart" than in 1976 when Bogle started the first index fund?
Poor analogy to follow....
Recall back in 1976 when we had only three ways to find our way driving from one place to another. We could look at a map and figure out what we thought was the best way to get from point A to point B. We could ask directions from someone who knew, or claimed to know, the best way to get there. Or we could just start driving and try to figure it out as well went. Imagine then if you could have traced the routes taken by everyone as they went from point A to point B. You would have a lot of routes, many of which would be very efficient and many less so. The route that the most folks took, was likely the most efficient route. However, due to vagaries of traffic, weather, or construction, other routes may be more efficient at any given time. The smart driver, knowing they can't know more than all the thousands of folks driving this route, would wisely choose the road most traveled. That is much like what Bogle did with the index fund. He crowd sourced investment decisions and used that to invest.
Now in 2025, imagine there is no GPS, but we do have massive social media. So instead of asking your friend how to get from A to B, you listen to an online "influencer" who has a number of followers that says everybody is taking this route. So the driver figures they know and they start to follow that route, increasing the number of followers this influencer has. Eventually, the scattergram of routes taken won't look like it did in 1976 but would be more constrained. Just by following that route, it has increased that routes influence.
Is that happening in the US equity market and if so, to what degree? If a third of the market is buying the market, doesn't that provide a feedback loop which artificially increases the market cap of some stocks and decrease others?
This can't be a new thought and I'm not smart enough to frame the question well, let alone answer it. Can anyone point me to articles or papers, that are hopefully accessible to the financially illiterate such as myself, that address this?
As I understand it, at least about 1/3 of the US equity market is made up of index investors. This would be not only index funds, but also "active managers" that use a given index as a baseline and then tweak it from there. Additionally, there are direct indexers that match their portfolios to a given index, just not through an index fund.
My question, is does this lead to the tale wagging the dog? My poor understanding of BH philosophy is that the market knows more collectively than anyone knows individually. In essence, an index is "crowd sourcing" the market. Is the high percentage of the market that is passively following an index skewing this? If so, does this mean that a total market index in 2025 is less "smart" than in 1976 when Bogle started the first index fund?
Poor analogy to follow....
Recall back in 1976 when we had only three ways to find our way driving from one place to another. We could look at a map and figure out what we thought was the best way to get from point A to point B. We could ask directions from someone who knew, or claimed to know, the best way to get there. Or we could just start driving and try to figure it out as well went. Imagine then if you could have traced the routes taken by everyone as they went from point A to point B. You would have a lot of routes, many of which would be very efficient and many less so. The route that the most folks took, was likely the most efficient route. However, due to vagaries of traffic, weather, or construction, other routes may be more efficient at any given time. The smart driver, knowing they can't know more than all the thousands of folks driving this route, would wisely choose the road most traveled. That is much like what Bogle did with the index fund. He crowd sourced investment decisions and used that to invest.
Now in 2025, imagine there is no GPS, but we do have massive social media. So instead of asking your friend how to get from A to B, you listen to an online "influencer" who has a number of followers that says everybody is taking this route. So the driver figures they know and they start to follow that route, increasing the number of followers this influencer has. Eventually, the scattergram of routes taken won't look like it did in 1976 but would be more constrained. Just by following that route, it has increased that routes influence.
Is that happening in the US equity market and if so, to what degree? If a third of the market is buying the market, doesn't that provide a feedback loop which artificially increases the market cap of some stocks and decrease others?
This can't be a new thought and I'm not smart enough to frame the question well, let alone answer it. Can anyone point me to articles or papers, that are hopefully accessible to the financially illiterate such as myself, that address this?
On investing; I have lots of questions, many opinions, and little knowledge. A dangerous combination. Be warned.
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Re: Is the level of index investing too high?
The answer is no. There are frequent discussions which are usually started by some paper advocating active management over index funds.
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Re: Is the level of index investing too high?
To continue your analogy, a market capitalization-weighted equivalent would be a road mapping service that monitors all the possible routes cars are taking and directs participating vehicles accordingly in the same ratios. Yes, it would get weird if everyone only used that services, but as long as a few people are blazing their own path the system will route the rest right along with them. Those following the mass will do precisely as well as the average commute; high-volume drivers looking to shave a half-second off their commute may find a faster way, but then the computers will notice and route a few "index" drivers right long with it.
I don't know, it made sense to me
I don't know, it made sense to me

Re: Is the level of index investing too high?
I am not concerned. People are still people and most of them are trying to find the "perfect portfolio", buying individual stocks, digital assets, paying AUM to managers who then serve up all manner of investments to demonstrate their worth and ensure stickiness to the client, and coming up with other ways to beat the market including the long term bonds with leverage approach hatched in our very own forum.
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Re: Is the level of index investing too high?
No.
Imagine that you have ten people, a ladle, and a pot of that holds ten ladlefuls of soup and fifty dumplings. If the pot is evenly mixed, every ladleful of soup will contain five dumplings.
The concentration of dumplings in the pot starts out at 5/ladle.
If there is a "bubble" in dumplings and everybody wants dumplings and the first five people manipulate the ladle so they each get ten dumplings--they want a "dumping tilt"--their actions create a scarcity of dumplings for the people who follow them. Consider the remaining fraction, dumpings/ladlesful. It starts at 5. After the first person, it is 40/9=4.44. Then 30/8=3.75. Then 20/7=2.857. Then 10/6=1.667. Then after the fifth person, all the dumplings are gone and the concentration has dropped to 0.
If dumplings are being valued by supply and demand, the shrinking supply will inflate their price. In a way, the actions of the first people are making the soup worse for the people who come afterwards.
If the first five people are index investors, though, they stir the pot thoroughly, and each of them will remove one ladleful of soup containing 5 dumplings. What remains in the pot, in terms of dumplings/ladlefuls, will be 45/9=5, then 40/8=5, then 35/7=5, then 30/6=5. When index investors take out their ladleful, the soup that remains has exactly the same composition as it did before. Nothing changes, nothing gets scarce.
Every other investing strategy can theoretically become a "crowded trade" if too many people follow it. Index investing is the only investing strategy that cannot.
Imagine that you have ten people, a ladle, and a pot of that holds ten ladlefuls of soup and fifty dumplings. If the pot is evenly mixed, every ladleful of soup will contain five dumplings.
The concentration of dumplings in the pot starts out at 5/ladle.
If there is a "bubble" in dumplings and everybody wants dumplings and the first five people manipulate the ladle so they each get ten dumplings--they want a "dumping tilt"--their actions create a scarcity of dumplings for the people who follow them. Consider the remaining fraction, dumpings/ladlesful. It starts at 5. After the first person, it is 40/9=4.44. Then 30/8=3.75. Then 20/7=2.857. Then 10/6=1.667. Then after the fifth person, all the dumplings are gone and the concentration has dropped to 0.
If dumplings are being valued by supply and demand, the shrinking supply will inflate their price. In a way, the actions of the first people are making the soup worse for the people who come afterwards.
If the first five people are index investors, though, they stir the pot thoroughly, and each of them will remove one ladleful of soup containing 5 dumplings. What remains in the pot, in terms of dumplings/ladlefuls, will be 45/9=5, then 40/8=5, then 35/7=5, then 30/6=5. When index investors take out their ladleful, the soup that remains has exactly the same composition as it did before. Nothing changes, nothing gets scarce.
Every other investing strategy can theoretically become a "crowded trade" if too many people follow it. Index investing is the only investing strategy that cannot.
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Re: Is the level of index investing too high?
As more people index, including through their 401k plans, more money is allocated by price-insensitive investors, pushing up the price and valuations of the biggest names.
The risk, as with any momentum strategy, is a crash if investors decide valuations are too high.
Does that mean active management is a better approach? No. Most active managers will still underperform.
A more prudent strategy would be allocating some of our assets to passively managed ETFs in less momentum-driven, cheaper areas such as non-U.S. small-cap value.

The risk, as with any momentum strategy, is a crash if investors decide valuations are too high.
Does that mean active management is a better approach? No. Most active managers will still underperform.
A more prudent strategy would be allocating some of our assets to passively managed ETFs in less momentum-driven, cheaper areas such as non-U.S. small-cap value.

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Re: Is the level of index investing too high?
1) This has nothing to do with indexing per se. It has to do with regular automatic investing in stocks. It doesn't make any difference whether the automatic contributions are going into Vanguard Total Stock, Fidelity Contrafund, or ARK Space Exploration.assetmix wrote: Mon Feb 03, 2025 6:08 pm ...As more people index, including through their 401k plans, more money is allocated by price-insensitive investors, pushing up the price and valuations of the biggest names.
The risk, as with any momentum strategy, is a crash if investors decide valuations are too high...
2) It doesn't push up the price and valuations of the biggest names relative to anything else. It does not buy more NVIDIA just because the price of NVIDIA has risen. It's true that if people buy more VTI, it will need to buy NVIDIA, but because it buys in the same proportions as the market, it doesn't drive up the price of any stock relatively more than any other.
3) Indexing is not a momentum strategy. Morningstar's factor profile for VTI, for examples, doesn't show any meaningful momentum tilt.

Certainly, there can be and have been asset bubbles in stocks. It is possible that automatic monthly contributions by millions of workers could contribute to such a bubble. But it is nothing to do with indexing.
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Re: Is the level of index investing too high?
Index investors don't set prices. We get the prices set by active traders. We are "free riding". When we buy "the market" we are owning it at the price set by all the other active participants.WeakOldGuy wrote: Mon Feb 03, 2025 3:28 pm Is that happening in the US equity market and if so, to what degree? If a third of the market is buying the market, doesn't that provide a feedback loop which artificially increases the market cap of some stocks and decrease others?
This can't be a new thought and I'm not smart enough to frame the question well, let alone answer it. Can anyone point me to articles or papers, that are hopefully accessible to the financially illiterate such as myself, that address this?
Now this might still make you nervous, especially if you think more of these active traders are the "dumb money" and buying meme stocks, reading wall street bets and just buying on whatever momentum stocks happen to have gone up recently (continuing to push prices ever higher).
But you see there's also a lot of smart people out there who are also setting prices. They may be selling shares at those high prices and/or shorting stocks and/or the market if they think it's overpriced. It was said that in the short term the market is a voting machine, but in the long run it is a weighing machine. Value will out. So the prices of stocks are factoring in all available information. When new information comes out it too will be factored in to the market and will move the price again, either up or down.
it was also said on the rational reminder podcast, no one person can know everything about the market, but all participants in aggregate can know everything about the market.
you should read The Arithmetic of Active Management, by William Sharpe.
Another thought often asked is "What if EVERYONE Indexed??". I'll let you do a search on bogleheads for that one. While it's possible the market would be less efficient under such conditions, that would create opportunities to arbitrage, which would only take place if someone(s) stopped indexing and started trading (to profit). So it's basically a nuthingburger. Certainly nothing to worry about because it's not likely to happen for all the reasons stated already: people can't help but buy individual stocks because they are in pursuit of the long tradition of trying to "beat the market". Things change, but people never do.
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Re: Is the level of index investing too high?
My question wasn't driven by the thought that maybe active management would be better. I don't think it would be. It was simply wondering if indexing would get less efficient if the market was skewed by a high percentage of the investment in the market, being invested in index driven portfolios.
Thanks for the replies. I will reread them a few times, as well as follow up the sources listed. However, on the first pass your replies have convinced me that a high percentage of portfolios following an index won't mess with the market significantly.
Thanks for the replies. I will reread them a few times, as well as follow up the sources listed. However, on the first pass your replies have convinced me that a high percentage of portfolios following an index won't mess with the market significantly.
On investing; I have lots of questions, many opinions, and little knowledge. A dangerous combination. Be warned.
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Re: Is the level of index investing too high?
It is not always about beating the market when one deviates from market-weight; managing personal risks can influence the portfolio construction. As long as there are investors who will assess the stocks for their merit on both sides of a trade, I am not concerned either with indexing.invest4 wrote: Mon Feb 03, 2025 4:24 pm I am not concerned. People are still people and most of them are trying to find the "perfect portfolio", buying individual stocks, digital assets, paying AUM to managers who then serve up all manner of investments to demonstrate their worth and ensure stickiness to the client, and coming up with other ways to beat the market including the long term bonds with leverage approach hatched in our very own forum.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: Is the level of index investing too high?
If automatic contributions by millions of workers skew toward the S&P 500 Index then there is more buying pressure on the index holdings compared to when most 401k plans holdings were active mutual funds. Active managers as a whole tend to skew toward mid to large-cap names while underweighting the mega-cap names.nisiprius wrote: Mon Feb 03, 2025 6:29 pm Certainly, there can be and have been asset bubbles in stocks. It is possible that automatic monthly contributions by millions of workers could contribute to such a bubble. But it is nothing to do with indexing.
So yes, more indexing can lead to a bubble with increased valuation for the index holdings.
Re: Is the level of index investing too high?
Fully agree…but maintain the strong belief that what I described is the many and what you described is much fewer. I know I used to do it…until I found this wonderful place.secondopinion wrote: Tue Feb 04, 2025 12:46 amIt is not always about beating the market when one deviates from market-weight; managing personal risks can influence the portfolio construction. As long as there are investors who will assess the stocks for their merit on both sides of a trade, I am not concerned either with indexing.invest4 wrote: Mon Feb 03, 2025 4:24 pm I am not concerned. People are still people and most of them are trying to find the "perfect portfolio", buying individual stocks, digital assets, paying AUM to managers who then serve up all manner of investments to demonstrate their worth and ensure stickiness to the client, and coming up with other ways to beat the market including the long term bonds with leverage approach hatched in our very own forum.
Best wishes.
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Re: Is the level of index investing too high?
You have it backwards. If 401K investors in aggregate tilted significantly to a market segment, it would push up the value of that segment causing a price distortion. If all 401K investors were to allocate to active funds, it still would look approximately like they hold a market index in aggregate, and it would not distort the market more or less than if they invested in the market portfolio.assetmix wrote: Mon Feb 03, 2025 6:08 pm As more people index, including through their 401k plans, more money is allocated by price-insensitive investors, pushing up the price and valuations of the biggest names.
The market portfolio holds stocks in approximate proportion to their liquidity, enabling it to absorb new investment without appreciably distorting prices, certainly moreso than any other portfolio held in aggregate by some large group.
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Re: Is the level of index investing too high?
I tend to think of the following link as potentially summarizing the position promoted by Michael Green. I'm under the impression that some of Green's contentions may not necessarily appear in line with source materials, so I'm hesitant to promote the viewpoint. Personally I have not ran across a source that can clearly support or deny the following line of thought around liquidity.Northern Flicker wrote: Wed Feb 05, 2025 3:25 amYou have it backwards. If 401K investors in aggregate tilted significantly to a market segment, it would push up the value of that segment causing a price distortion. If all 401K investors were to allocate to active funds, it still would look approximately like they hold a market index in aggregate, and it would not distort the market more or less than if they invested in the market portfolio.assetmix wrote: Mon Feb 03, 2025 6:08 pm As more people index, including through their 401k plans, more money is allocated by price-insensitive investors, pushing up the price and valuations of the biggest names.
The market portfolio holds stocks in approximate proportion to their liquidity, enabling it to absorb new investment without appreciably distorting prices, certainly moreso than any other portfolio held in aggregate by some large group.
https://www.cworldwide.com/insights-new ... ment-flows.
If I tried to summarize what I've personally read, my conclusions end up rather indefinite, somewhat similar to the position taken by GMO.Liquidity scales differently
In addition, liquidity scales differently across the continuum of market capitalisation in that there is an inverse relationship between the liquidity of a stock and the market capitalisation.
As flows are increasingly being allocated to market capbased investment structures and because the bigger the market cap, the lower the relative liquidity, this will have a more significant pricing impact for larger companies, where the inelasticity is greatest, see Figure 3 (in PDF).
This needs to be repeated because we were amazed when we learned this: the relative liquidity of large market capitalisation stocks is lower than that of lower market cap stocks. For example, Apple’s market cap is 187 times larger than Clorox’s. Still, the difference in average daily traded volumes is only 35 times, i.e., in relative terms, Clorox is 5 times more liquid than Apple. This is an essential explanation for the rising concentration of indices in the US. When passive (free floatadjusted) market cap flows hit the market, they impact the largest stocks the most. From an empirical perspective, most flows into passive are intra-equity flows from active managers being liquidated, see Figure 4 (in PDF).
The net effect is cumulative fund flows increasing for passive strategies and decreasing for active ones. This is another driver of the rising concentration in markets, in that active-manager liquidation results in selling pressure in, on average, lower market capitalisation stocks. In contrast, passive index buying, on average, buys more mega-cap stocks than what is being sold because active managers tend to underweight the largest stocks. The switch from active to passive will likely magnify the upward pressure on demand for large and mega-cap stocks and decrease demand for smaller-cap stocks.
https://www.gmo.com/americas/research-l ... rlyletter/
The first argument hinges on where passive flows came from. If these inflows were mainly funded from equities to begin with, mega-caps could have on net received a demand tailwind if the active funds sold to make way for passive had been systematically underweight mega-caps. Given that in aggregate active participants own the market, this is only possible if passive flows were primarily coming from institutional active managers (as opposed to the other big active subset: retail), who are known for being systematically underweight mega-caps to make room for their active bets.
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Re: Is the level of index investing too high?
Matt Levine, a Bloomberg columnist, frequently writes about the real and/or perceived distortions caused by mass adoption of index funds. If you're interested, I'd suggest signing up for his free newsletter. From a recent column:
Personally, I see the theoretical risk, if any, of widespread adoption of indexing by retail investors being that indices are driven by the whims of retail investors and not market fundamentals. If retail investors are more likely to sell in market dips, then widespread indexing would theoretically worsen those dips and make the market more volatile. If retail investors are more likely to get in to the market later after a dip, it would theoretically lengthen the period before a recovery. And theoretically prices would be affected by increased withdrawals as baby boomers age, or after they die and assets are liquidated to pay taxes or for use by heirs. How pronounced are those effects compared to a world in which retail investors still followed investment patterns from a generation or two ago, when most people had actively managed portfolios or bought and held individual blue-chip stocks? Who knows.A thing that people used to worry about is “what if index funds get too big?” If most of the money in the stock market is not run by people who are picking stocks and evaluating companies and deciding how much they are worth, but by people who just buy all the stocks at whatever the price is, that seems like it might have weird results. “Worse than Marxism,” some Sanford C. Bernstein & Co. analysts once called it: With only passive investors, how could the market allocate capital?
These days that worry has receded a bit; these days the big exchange-traded fund launches are for, like, levered single-stock ETFs or a Trumpcoin ETF, so the death of active investing seems to have been exaggerated. Still there has been a long-term trend toward indexing, and it is interesting to consider its effects on market efficiency.
It is fun — difficult, but fun — to imagine a world with only index funds, one where nobody actively picked stocks and everyone just bought all the companies in proportion to their market capitalizations. One thing to realize is that, in this world, there would still be some trading. For one thing, there would be changes in ultimate investors, the clients of the index funds: Young people would get paychecks and invest some of them (in index funds) for retirement; older people would retire and withdraw some money (from index funds) to live on; people would move between cash and the stock market (index funds). The index funds would need, somehow, to buy and sell stocks to take in and give back money.
For another thing, even in a world where the only investors are index funds, they would have counterparties. The counterparties are companies. Companies are, in some rough sense, the counterparties of the whole stock market: When the stock market as a whole is buying stock, it must be buying the stock from somewhere (from companies looking to go public, and from already-public companies looking to raise more money by issuing more stock), and when the stock market as a whole is selling stock, it must be selling stock to someone (to companies doing stock buybacks, and to private equity firms taking public companies private for cash).
What would these trades look like? I don’t know, this is a weird hypothetical. But roughly speaking, I think the idea would be that each company would have sort of a permanent stock price — set, I guess, by the last trade before the market went all-index? — and that stock price would not really change, because index funds are pure price takers and would not update the stock price for new information. And the company could issue new stock at the permanent stock price, and could buy back stock at the permanent stock price. Sometimes companies would do this for basic corporate finance reasons: They need money, so they sell stock, or they have too much money and nothing to do with it, so they buy back stock.
But often companies would do trades based on price. A company would get some good news about its business, it would think “oh wow the present value of our future cash flows went up, but our stock price did not,” so it would buy back some stock because the stock is cheap. It would get some bad news, think “uh oh the present value of our future cash flows went down, but our stock price did not,” so it would sell stock because the stock is cheap. Private equity firms would take companies private when the market temporarily undervalued them, and take them public again when they could get an irrationally good price. [1]
This is all sloppy and loose but perhaps a decent guide to intuition. Anyway here’s a recent paper by Marco Sammon and John Shim titled “Index Rebalancing and Stock Market Composition: Do Index Funds Incur Adverse Selection Costs?”
We find that index funds incur adverse selection costs from changes in the composition of the stock market. This is because indices rebalance in response to composition changes, both on the extensive margin (IPOs/delistings or additions/deletions) and intensive margin (issuance/buybacks). This rebalancing approach successfully captures the market as it evolves, but effectively buys at high prices and sells at low prices. A long-short portfolio capturing the intensive margin rebalancing trades of index funds has an average alpha of -3% to -4% per year. Despite representing a size of less than 10% of AUM, this rebalancing portfolio does poorly enough to drag down overall index fund returns. We estimate that a "sleepy" strategy that rebalances annually improves fund returns by 40 bps per year relative to rebalancing quarterly. We argue this is because sleepy rebalancing avoids the short-and medium-term adverse selection associated with relatively quickly taking the other side of firms' primary and secondary market activity.
One thing that is interesting about this finding is that I always vaguely assume that companies are very bad at timing stock buybacks and issuances. My impression is that public companies tend to issue stock when they desperately need to, so the stock price is low, and they tend to buy back stock when everything is great, so the stock price is high. (That is: Companies sometimes do issuances and buybacks as price-based trades, but they more often do them for fundamental reasons with little price sensitivity.) But, no, the index funds’ trades with companies have negative alpha, suggesting that the companies have positive alpha. I suppose the model might be “active investors are better than companies at buying low and selling high, but passive investors are worse.”
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Re: Is the level of index investing too high?
I listened to an interview of Michael Green on the Bloomberg Odd Lots podcast and considered his position articulated there to be neither logically consistent nor correct.alluringreality wrote: Wed Feb 05, 2025 6:35 amI tend to think of the following link as potentially summarizing the position promoted by Michael Green. I'm under the impression that some of Green's contentions may not necessarily appear in line with source materials, so I'm hesitant to promote the viewpoint.Northern Flicker wrote: Wed Feb 05, 2025 3:25 am
You have it backwards. If 401K investors in aggregate tilted significantly to a market segment, it would push up the value of that segment causing a price distortion. If all 401K investors were to allocate to active funds, it still would look approximately like they hold a market index in aggregate, and it would not distort the market more or less than if they invested in the market portfolio.
The market portfolio holds stocks in approximate proportion to their liquidity, enabling it to absorb new investment without appreciably distorting prices, certainly moreso than any other portfolio held in aggregate by some large group.
The arguments in the thread are focused only on demand and not supply. Price changes or distortions occur based on the balance of supply and demand. The fact that the most funds flow into the stocks with the largest supply of market cap is not by itself a distorting event. In fact, it generally has to happen to prevent a distorting event, which would be caused by the flows being much greater or much less than the supply.
What is true is that if a stock is overpriced, a contribution to an index fund will buy it at its price. The same is true of an underpriced stock, and this applies to selling as well. The index fund investor believes that the market does a good enough job of pricing stocks that the over and underpriced stocks offset each other on average. The index fund investor also believes that the market does a good enough job pricing stocks that active management to try to find the stocks that are mispriced is insufficient to overcome its cost. This assumes we have sufficient price discovery for the market to do an adequate job of pricing securities for errors to offset on average.
I don't think we are anywhere close to what would be needed to have insufficient price discovery in the market, and I think there are enough institutional investors looking for active opportunities that we are unlikely to reach that point. In fact, I believe that Mr. Green is an active manager already looking for distortions caused by indexing.
Last edited by Northern Flicker on Wed Feb 05, 2025 1:29 pm, edited 1 time in total.
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Re: Is the level of index investing too high?
Active traders (well the good ones) love to see distortions in the market. Their actions (buying over-sold assets and selling over-bought assets) will push the market back into equilibrium. That will make successful active traders very rich, ensuring an adequate supply of them.
This will keep the indexers in line as they mimic the market's equilibrium.
This will keep the indexers in line as they mimic the market's equilibrium.
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Re: Is the level of index investing too high?
I've spent a fair amount of time trying to figure out how to bullet point his core position. I've found some of the items he references interesting. The main reason I bring it up is that, in line with the original post, his "steamroller" narrative seems to generally suggest a positive feedback sort of situation.Northern Flicker wrote: Wed Feb 05, 2025 1:06 pm I listened to an interview of Michael Green on the Bloomberg Odd Lots podcast and considered his position articulated there to be neither logically consistent nor correct.
https://scholar.harvard.edu/shleifer/fi ... edback.pdf
Occasionally he makes comments that are probably testable, for example Vanguard specifically disputed his position regarding trading.
https://www.institutionalinvestor.com/a ... -investing
I'm under the impression that Vanguard's position probably aligns with the following.Using statistics compiled from various market and academic sources, Green estimates that passive direct trading now accounts for about 20 percent of all trading, passive index derivatives make up 8 percent, and passive market making contributes a further 36 percent. By contrast, trading by active managers totals only 10 percent, down from 80 percent in 1995.
Vanguard disputes Green’s analysis of the outsize role of passive in today’s markets, saying its trading is a “drop in the bucket.” In a statement to II, Vanguard says: “Our base case estimates that index funds account for approximately 1 percent of overall trading volume on U.S. exchanges, well below the more widely quoted 5 percent to 7 percent. Even after accounting for indexed portfolio management outside of registered funds and removing trading volume due to [high-frequency trading] and shares of ETFs, we estimate that indexing represents less than 5 percent of overall U.S. trading volume.”
https://corporate.vanguard.com/content/ ... online.pdf
40% US Indexes, 25% Ex-US Indexes, 35% Fixed Income - Buy & Hold
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Re: Is the level of index investing too high?
Well developed, cogent positions generally can be summarized succinctly even if the nitty gritty details are very complex.alluringreality wrote: Thu Feb 06, 2025 6:32 amI've spent a fair amount of time trying to figure out how to bullet point his core position.Northern Flicker wrote: Wed Feb 05, 2025 1:06 pm I listened to an interview of Michael Green on the Bloomberg Odd Lots podcast and considered his position articulated there to be neither logically consistent nor correct.
Re: Is the level of index investing too high?
about 30% of the us stock market is held in mutual funds/etfs. only half of that is index funds. so 15% of total market. Mind you there are hundreds if not thousands of index funds. sector indexes, value indexes, growth indexes, small cap indexes, large cap indexes, etc etc etc. Also there is no perfect timing of in or outflows. So while there are lots of "index investors" their portfolios HARDLY represent the market. still plenty of active purchasing happening.
Re: Is the level of index investing too high?
Not worried yet. I think Larry Swedroe said that 20% of the market had to be active to maintain price discovery, the actual percentage might be lower than that. According to Avantis, at the end of 2023, only 18% of US stocks were held by index tracking mutual funds and ETFs. So we have a long way to go, it is the least of things that I am concerned about.
https://www.avantisinvestors.com/avanti ... n-too-big/
https://www.avantisinvestors.com/avanti ... n-too-big/
A fool and his money are good for business.
Re: Is the level of index investing too high?
No, it's not.
I tried really hard to convince myself it was.
But every time I thought I found data that backed it up, it turned out I hadn't:
viewtopic.php?t=443585
It's kind of embarrassing, but you might find it helpful.
I tried really hard to convince myself it was.
But every time I thought I found data that backed it up, it turned out I hadn't:
viewtopic.php?t=443585
It's kind of embarrassing, but you might find it helpful.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin