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re: Michael Burry calls passive investments/index funds a bubble
Posted on 9/6/19 at 11:14 am to Ole War Skule
Posted on 9/6/19 at 11:14 am to Ole War Skule
I would look at the annual statement and see if they hold any options or futures. I just checked my Vanguard ones and they all do.
ETA: I am no expert. It is just something I have looked at over the years and wondered how all these funds traded the exact same stocks in the exact same percentages and new ETFs and new funds constantly being created. When you read the fine print they use derivatives to bridge the gaps and some ETFs that claim to track are all created in the "lab" so to speak.
ETA: I am no expert. It is just something I have looked at over the years and wondered how all these funds traded the exact same stocks in the exact same percentages and new ETFs and new funds constantly being created. When you read the fine print they use derivatives to bridge the gaps and some ETFs that claim to track are all created in the "lab" so to speak.
This post was edited on 9/6/19 at 11:17 am
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Posted on 9/6/19 at 11:16 am to SlowFlowPro
This thread has sparked interest across mediums. I got this via email.
quote:
He’s saying it’s a bubble because there is no more price discovery. It’s much like in economics when demand shifts right the price increases, but it’s always trying to find that market or equilibrium price. There’s no price discovery because you are buying every stock within that index at a percentage. Let’s say ITOT has MSFT underlying at 3.61% and has JPM at 1.23%. With price discovery each of these underlying shares would fluctuate independently to seek the market price. With indexing they are all evenly funded driving up the share price of some underserving underlying stocks.
Posted on 9/6/19 at 11:18 am to SlowFlowPro
I agree with that too. I just think the derivatives some of these ETFs and Funds hold to mimic the returns of these stocks make it even more interesting.
Posted on 9/6/19 at 11:21 am to LSUtoOmaha
quote:
Maybe he simply means that people have no real regard for what they are buying?
I agree with this. I've posted on here, and there are many articles reporting this, that 14% of the companies in the S&P 1500 are considered "zombie" companies - basically a company that can't make it's debt obligations without taking on more debt. That's a massive percentage of the index especially considering the FAAMG stocks is such a large portion of the market at this point...
The fact is people are disregarding earnings, debt levels, corporate governance, etc in order to buy the indexes. There is no regard for the underlying fundamentals - only that "if you'd have bought the index 50 years ago your returns would be better than 80% of actively managed funds." I can see how that will sting in the next real downturn when indexes have to unload their MSFT and AAPL because, well, they have to sell.
Posted on 9/6/19 at 11:30 am to lsu13lsu
That is not true. ETF’s do own the actual underlying assets.. ETN’s will fit your description however and will own the derivatives to mimic the index.
Posted on 9/6/19 at 11:30 am to gpburdell
quote:
This premium or discount from the NAV can be significant on ETFs with low volume.
I get that, but I've always viewed that as mechanistic - because you buy the ETF in real time (just as if it was a stock, for trading purposes), the premium/discount should alternate if you're in a dollar cost averaging, regular buy (or sell, for that matter), schedule.
What Burry is saying - at least as far as I can glean - is that low price per share/low volume stocks are tougher to accurately value and could potentially be this "bubble" - and I say, only if they are all overvalued. If (much like discount/premiums) in the aggregate, they wash out (which without researching I must assume happens over time) and zero out each other, it should be the rare time when someone gets badly screwed. And a handful of folks getting screwed occasionally isn't a bubble.
Posted on 9/6/19 at 11:36 am to Ace Midnight
The only thing standard index ETF purchases do poorly is reward overvalued stocks and under appreciate companies that have better outlooks versus current market “vote.”
The tax efficiency, costs, liquidity and structure make up for some of these shortcomings.
And to the poster who said ETFs don’t own the underlying stocks, not true. SPY owners actually have ownership in the underlying securities. Highly liquid ETFs carry a tight spread on premium/discount, so unless you get a bad execution price, arbitrage in the markets remove the risk of paying way above/below NAV.
ETA: If there is any excess or bubble right now it’s the perceived safety of 0% or negative yielding bonds across the globe.
The tax efficiency, costs, liquidity and structure make up for some of these shortcomings.
And to the poster who said ETFs don’t own the underlying stocks, not true. SPY owners actually have ownership in the underlying securities. Highly liquid ETFs carry a tight spread on premium/discount, so unless you get a bad execution price, arbitrage in the markets remove the risk of paying way above/below NAV.
ETA: If there is any excess or bubble right now it’s the perceived safety of 0% or negative yielding bonds across the globe.
This post was edited on 9/6/19 at 3:52 pm
Posted on 9/6/19 at 11:40 am to LSUcam7
quote:
Highly liquid ETFs carry a tight spread on premium/discount, so unless you get a bad execution price, arbitrage in the markets remove the risk of paying way above/below NAV.
this thread certainly has produced a lot of words
Posted on 9/6/19 at 11:41 am to SlowFlowPro
Sorry I’ll dumb it down.
Highly traded ETFs won’t frick you on price.
Highly traded ETFs won’t frick you on price.
Posted on 9/6/19 at 11:41 am to lsu13lsu
quote:
The average person doesn't realize that an S&P 500 mutual fund/ETF doesn't really own the underlying stock. There isn't enough stock to go around because of how many funds/etfs there are that want to match the S&P 500 etc. What these funds/etfs own is derivatives of said stock that "mimic" the stock.
That's false.
The crux of the issue is that it works well if limited amount of people invest in these funds, because you still need people to regulate the market and sell off shitty companies and buy up good ones. If the spread ever gets too wide, the shorts and active managers will take care of that in theory. Unless the amount of passive investors grows to critical mass and you can't overcome this large amount of "dumb" money holding onto a stock. I don't think we are anywhere near this level of passive investing.
Posted on 9/6/19 at 11:46 am to barry
quote:
The crux of the issue is that it works well if limited amount of people invest in these funds, because you still need people to regulate the market and sell off shitty companies and buy up good ones. If the spread ever gets too wide, the shorts and active managers will take care of that in theory. Unless the amount of passive investors grows to critical mass and you can't overcome this large amount of "dumb" money holding onto a stock. I don't think we are anywhere near this level of passive investing.
Can you give a ballpark on current percentages versus percentages that you would deem might would be approaching "critical mass"?
Posted on 9/6/19 at 12:32 pm to barry
Would another way to say it be that these potentially overvalued, low price/volume stocks are being marked to an inefficient market? And, once the market becomes more efficient, their true, lower values will suddenly be recognized in the total value of these funds.
Posted on 9/6/19 at 3:58 pm to Oizers
Yep. These indexes are reconstructed every so often, maybe 1-4 times per year depending.
As that happens, companies that aren’t growing relative to the markets will make up smaller allocations within the ETF index themselves.
A problem with ETFs may come when one sector makes up far too much of the index. Think tech bubble circa 2000 when tech made up over 30% of the SP500. You would have been too exposed to a bubble asset.
Those excesses aren’t here to those extremes. At least not today.
As that happens, companies that aren’t growing relative to the markets will make up smaller allocations within the ETF index themselves.
A problem with ETFs may come when one sector makes up far too much of the index. Think tech bubble circa 2000 when tech made up over 30% of the SP500. You would have been too exposed to a bubble asset.
Those excesses aren’t here to those extremes. At least not today.
Posted on 9/6/19 at 4:23 pm to UpstairsComputer
quote:I don’t understand your argument here. There there is plenty of people, funds, money, etc. who are not doing any of this, like it’s been done forever. Unless the growth trends, market cap distribution is somehow different than the fundamentals would suggest historically, then what basis do you have for this?
The fact is people are disregarding earnings, debt levels, corporate governance, etc in order to buy the indexes.
Furthermore, how exactly does someone investing in the broad indexes, impact anything within the market, between the individual stocks?
Posted on 9/6/19 at 5:10 pm to buckeye_vol
I may not understand your question, but I think what you're asking is why do I think people are disregarding fundamentals when investing in an index? If you know 14% of your investment will be bankrupt effecting all of the other investments should one factor change - in this case interest rates rising and liquidity tightening (see Q42018) - you have to ignore this information (or decide the risk is worth it) in order to proceed with the investment anyway.
Regarding the second question, if an individual company's stock price can be artificially pumped up by virtue of being in the right index and the passive buying of their shares, that company gets to do any number of things from issuing debt to dilution of shares, etc. in order to stay afloat whereas before the rise of index funds an active manager would cut it from it's holdings for not meeting criteria (debt levels, earnings, growth, or whatever the fund's objective was) and we'd all find out who was swimming naked when the tide went out.
I read this story earlier this week, but I've been reading about the passive indexing bubble for years. It makes sense to me. Here's one I read last year that's pretty thorough: LINK
Regarding the second question, if an individual company's stock price can be artificially pumped up by virtue of being in the right index and the passive buying of their shares, that company gets to do any number of things from issuing debt to dilution of shares, etc. in order to stay afloat whereas before the rise of index funds an active manager would cut it from it's holdings for not meeting criteria (debt levels, earnings, growth, or whatever the fund's objective was) and we'd all find out who was swimming naked when the tide went out.
I read this story earlier this week, but I've been reading about the passive indexing bubble for years. It makes sense to me. Here's one I read last year that's pretty thorough: LINK
Posted on 9/6/19 at 5:37 pm to SlowFlowPro
quote:
Compares them to CDOs in 2008
Posted on 9/6/19 at 5:41 pm to Y.A. Tittle
quote:A lot more than the <25% where it currently sits
Can you give a ballpark on current percentages versus percentages that you would deem might would be approaching "critical mass"?
This post was edited on 9/6/19 at 5:42 pm
Posted on 9/6/19 at 8:26 pm to Louie T
He says the small companies don't have enough outstanding stock for ALL the index funds out there. Might be true if the Vanguard Wilshire 5000, Fidelity Wilshire 5000 and Blackrock's fund bought shares in every single company. My understanding is they do not. They try to weight to each sector, and buy a few companies in each sector. And the different funds don't buy the same companies. Ie, their ownership is spread out. I think. I think I read that once.
Indexes are effective when there are enough active funds and individual owners to keep it liquid. Ie, you have a critical mass of actual people involved as well. We may not have that now; I'm not sure.
Indexes are effective when there are enough active funds and individual owners to keep it liquid. Ie, you have a critical mass of actual people involved as well. We may not have that now; I'm not sure.
Posted on 9/6/19 at 8:47 pm to SlowFlowPro
tranche A
tranche B
tranche C
tranche B
tranche C
Posted on 9/6/19 at 9:30 pm to SlowFlowPro
If index funds like S&P 500 and VTSAX are in a bubble then everything is in a bubble.
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