Today we're discussing the potential of an Index Fund Bubble, what this means for the market, and how you can use this information to make money - Enjoy! Add me on Instagram: GPStephan
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According to Michael Burry, the investor who predicted the 2008 Subprime Loan Crises, as featured in the movie “The Big Short,”…says that index fund investing is ARTIFICIALLY inflating the price of the stock market, because people are driving up those prices through index funds - and that’s causing an imbalance between what a stock is NOW valued, versus what it’s actually worth.
From a data-driven standpoint, Michael Burry is right. A LOT of money is pouring into index funds….for example, in 2002, just 2% of the US stock market value was held in an index fund…now, they control 20-30% of the ENTIRE market…and growing. In fact, it’s even said that, “for nine in 10 companies on the S&P 500, their largest single shareholder is one of the Big Three Investment Firms: Vanguard, Blackrock, and State Street.
In terms of any immediate concern: probably not.
As most of you know, price movements are caused by ACTIVE TRADING VOLUME…meaning, how many people are buying, and how many people are selling?
In THIS case…Vanguard took to the data to determine JUST how big of an impact index funds were causing on the market…and the result was: not much. In fact, they found that Index Funds only accounted for 1% of all daily trading volume…and the OTHER 99% was from active traders, hedge funds, and individual investors….meaning….no, index funds are not distorting stock values out of proportion…yet.
Now, of COURSE…if they DID begin to push stock prices in a bubble territory…then one would assume that an ACTIVELY managed fund would be able to spot the inefficiencies…make crazy profits…and, begin to outperform…but, that hasn’t happened…and, who knows if that will EVER happen.
So, given all of this…no, I personally don’t see there being any signs of an index fund bubble - and none of my research points to anything that would confirm its cause for concern. Yes, voting control MIGHT be an issue in the future…but, assuming they have their investors best interest at heart…they should be voting in favor of you…plus, when’s the last time you ever actually cast your vote for a stock?
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