Planet Money Newsletter: Index Fund Questions

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Burry recently told Bloomberg that he sees another massive bubble happening. This time, he says, it's in index funds...

Actively buying and selling stocks and bonds provides a service to the market: It's called "price discovery." If something is overvalued, traders sell it. If it's undervalued, they buy it. That moves the price of the asset, and it is the crucial mechanism to make sure the price is right, signaling its true value.

But index funds don't really discover prices. Investors just dump money into these investments, which mindlessly hold stock in companies whether they're doing well or not. Burry believes the fall of active buying and selling has led to overvaluations, and he's predicting a crash in the value of the large companies held in index funds. "I just don't know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be," he told Bloomberg. He's now investing in small companies, which he says are often ignored by index funds...

"In this Giant Three scenario, three investment managers would largely dominate shareholder voting in practically all significant U.S. companies that do not have a controlling shareholder," Bebchuk and Hirst warn. They fear this could have drastic implications for corporate governance and competition...

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