{"id":1775,"date":"2019-11-22T14:39:31","date_gmt":"2019-11-22T14:39:31","guid":{"rendered":"http:\/\/wdsinvest.com\/?p=1775"},"modified":"2026-02-17T21:49:08","modified_gmt":"2026-02-17T21:49:08","slug":"deflating-the-index-fund-bubble-argument","status":"publish","type":"post","link":"https:\/\/wdsinvest.com\/fr\/deflating-the-index-fund-bubble-argument\/","title":{"rendered":"Deflating the Index Fund Bubble Argument"},"content":{"rendered":"
<\/figure>\n\n\n\n

Back in September, Bloomberg released an interview with\nhedge fund manager Michael Burry (link<\/a>).\nBurry is famous for predicting the housing market bubble of 2008; he is even\ndepicted by Christian Bale in \u201cThe Big Short\u201d film, based on the book by\nMichael Lewis. In this interview, however, Burry expressed his concern that\nindex funds were causing a bubble in stocks. \n<\/p>\n\n\n\n

Index funds, which come in both a mutual fund and exchange-traded\nfund (ETF) form, are investment vehicles that mimic an index, providing passive\nexposure to the market. These investments don\u2019t analyze the stocks they invest\nin, instead simply allocating funds to a diversified pool of stocks deemed\nrepresentative of a market segment. This means that they don\u2019t contribute to\nprice discovery, the process by which stock prices come to reflect their actual\nworth. Afterall, when a company releases bad news, the stock will typically\nfall in price, but if no one is trading based on analysis (i.e. if everyone\nused index funds), then the price would not change, even if the fundamentals of\nthe firm were materially different now. <\/p>\n\n\n\n

The crux of Michael Burry\u2019s argument is therefore that, with\nindex funds seeing massive inflows over the past decade, stocks are seeing\ntheir prices inflate without any fundamental reason for the higher price. This\ncould then, in theory, lead to a bubble.<\/p>\n\n\n\n

So, are index funds causing a stock bubble? Perhaps, but as you\u2019ll see the situation isn’t as bad as it appears at first glance.<\/p>\n\n\n\n

Firstly, if there is a problem, it is likely concentrated to\nthe U.S. stock market, which has an above-average utilization of index funds.\nIn America, for example, passive index funds recently surpassed active funds in\nterms of assets under management, meaning that more investors held index-like\nfunds than actively managed funds. In Canada, however, roughly 90% of fund\nassets are still actively managed (turns out free health care isn\u2019t the only\nbenefit of living in the North!).<\/p>\n\n\n\n

Secondly, even with over half of fund assets being managed\npassively, index funds still only represent around 15% of the U.S. stock market\nas a whole; there are plenty of assets held outside of these funds, many of\nwhich are actively managed (just like our own segregated accounts here at WDS).<\/p>\n\n\n\n

Finally, even with passive funds holding a sizeable chunk of\nthe market, only 5% of trading activity is estimated to follow index mandates.\nThis means that active trading still dominates the price-setting mechanism of\nthe markets. <\/p>\n\n\n\n

All of this isn\u2019t to say that stocks won\u2019t experience a down turn in the future, nor that index funds couldn\u2019t cause a problem in the future, but what it does show is that the problem isn\u2019t as big as it\u2019s been portrayed. It\u2019s impossible to know when the next recession or bubble will hit, however monitoring stock valuations allows us to directly see how much we\u2019re paying for a company; by sticking to high quality picks, investors should have no problem weathering future downturns if they focus on the long-term.<\/p>","protected":false},"excerpt":{"rendered":"

Back in September, Bloomberg released an interview with hedge fund manager Michael Burry (link). Burry is famous for predicting the housing market bubble of 2008; he is even depicted by Christian Bale in \u201cThe Big Short\u201d film, based on the book by Michael Lewis. In this interview, however, Burry expressed [\u2026]<\/span><\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[19,21,20],"class_list":["post-1775","post","type-post","status-publish","format-standard","hentry","category-miscellaneous","tag-index-fund-bubble","tag-watson-di-primio-steel","tag-wds-investment-management"],"yoast_head":"\nDeflating the Index Fund Bubble Argument - Watson Di Primio Steel (WDS)<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/wdsinvest.com\/fr\/deflating-the-index-fund-bubble-argument\/\" \/>\n<meta property=\"og:locale\" content=\"fr_FR\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Deflating the Index Fund Bubble Argument - Watson Di Primio Steel (WDS)\" \/>\n<meta property=\"og:description\" content=\"Back in September, Bloomberg released an interview with hedge fund manager Michael Burry (link). Burry is famous for predicting the housing market bubble of 2008; he is even depicted by Christian Bale in \u201cThe Big Short\u201d film, based on the book by Michael Lewis. 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