Indexing overtakes Active Investing

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I Shrugged
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Indexing overtakes Active Investing

Post by I Shrugged » Thu Sep 12, 2019 7:36 pm

I saw this yesterday. I'm pretty sure it was from CNBC.com, but I can't find the link.

The amount of money in index funds has finally overtaken that in active funds. Let's assume I didn't imagine this. ;)
I've said for years that there has to be a tipping point, where there is so much automatic investment in the market that price discovery will be flawed, and then anything could happen.

I don't think we are there yet. But at some point, the contrarian thing to do will be to avoid index funds. I think.
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Kbg
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Re: Indexing overtakes Active Investing

Post by Kbg » Fri Sep 13, 2019 11:58 am

Well this is complex, a couple of items...

1. There are a LOT of indexes now based on different things (factors, sectors, etc. etc.) One could argue that factor algos are nothing but an automated price discovery mechanism and modern market makers are probably 99.999% automated in terms of trade by trade price discovery based on supply and demand of the moment.

2. There are academic studies out there that suggest you don't need a lot of active managers to make price discovery happen as in below 20% of volume.

3. Finally, way before the information age huge market swings in very short time periods would occur...so how "accurate" is price discovery anyway?

Pretty much the only people making this argument are active managers...the fact is they're ticked off because of the efficiency that exists in the market now. Their jobs are WAY tougher.
Last edited by Kbg on Fri Sep 13, 2019 3:42 pm, edited 1 time in total.
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Tyler
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Re: Indexing overtakes Active Investing

Post by Tyler » Fri Sep 13, 2019 12:15 pm

The articles I've found about active vs passive funds are written to make it sound like it's a big deal but are all very vague about an important qualifier. For reference, mutual funds and ETFs combined only own about 29% of the US stock market. So even if passive funds are now more than half of all retail funds, that's still only about 15% of the total market that is indexed.

https://awealthofcommonsense.com/2019/0 ... cks-bonds/

Price discovery isn't going anywhere any time soon.
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Tortoise
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Re: Indexing overtakes Active Investing

Post by Tortoise » Fri Sep 13, 2019 6:02 pm

Don’t forget that even if all investors were 100% indexed someday, a bunch of them would still actively trade their index funds by trying to time the market.

Index investing and passive investing aren’t necessarily the same thing. It’s possible to actively invest in passive (index) funds and passively invest in active funds.
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Kbg
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Re: Indexing overtakes Active Investing

Post by Kbg » Sat Sep 14, 2019 4:24 pm

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