# Bubble in passive investment funds
**URL:** https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501
**Category:** Investing / Portfolios
**Created:** [September 8, 2019, 6:36pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501 "2019-09-08T18:36:24Z")
**Posts on this page:** 20
**Page:** 6
### Author:  [@Mirager](https://forum.mustachianpost.com/u/Mirager)
#### Post date: [November 27, 2024, 10:32pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/104 "2024-11-27T22:32:51Z")
> [@Abs\_max](#):
>
> I hope active funds and active investors can hold their ground and keep market balanced.
As I am sure you know, the magic trick is that very little active investing is needed to keep the market pretty efficient, and if it stopped the market would become so inefficient that the opportunity for profit would become so big that new active investors would have to sprout, and the cycle goes ever on.
It’s a symbiotic relationship!
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### Author:  [@Abs\_max](https://forum.mustachianpost.com/u/Abs_max)
#### Post date: [November 27, 2024, 11:05pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/105 "2024-11-27T23:05:31Z")
I used to think like this. But I think “very little” would not work.
It needs to be sufficient. I don’t know where that number would be but it’s definitely not 10%.
I would like to see some latest data on daily trading of stocks and what portion of those trades are made by active vs passive investors. The problem always is that slowly even large funds are becoming “index hugging “ which result in a “passive” trade under disguise of “active” . I think we should take Michael Green seriously. He makes some good points.
If there are thousands of buy orders (due to DCA practices deployed by retail investors , pension funds & maybe even institutions) which have only one mandate “buy”. Then in that case a few handful of “sell” orders from Active wouldn’t suffice to bring the price of security at right level
The big three (Blackrock. vanguard and SPDR) have vested interest in making passive grow. I really think the tables are now turning and we need to look at “advise” from index funds carefully and not take them at face value.
Having said all of the above -: I actually don’t know what the solution to all this actually is. I am hoping that this issue will resolve itself somehow before it gets to point of no return
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### Author:  [@dbu](https://forum.mustachianpost.com/u/dbu)
#### Post date: [November 28, 2024, 5:34am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/106 "2024-11-28T05:34:41Z")
> [@Abs\_max](#):
>
> I am hoping that this issue will resolve itself somehow before it gets to point of no return
Ye olde BF has some consolation for you, as always
[![](https://forum.mustachianpost.com/uploads/default/original/2X/a/aff5f5baa208d469a54a9ad37166f150b25f84a6.jpeg "The Index Fund "Tipping Point"") ](https://www.youtube.com/watch?v=ltuqXTwWsZ8)
* * *
Also the latest discussion
https://open.spotify.com/embed/episode/3uMfWx3qk8y865wfvdW2nZ?utm_source=oembed
(This Randolph guy speaks too nervously for my taste)
I’m sure Ben and Cam were exchanging popcorn gifs on a private chat. 😅
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### Author:  [@Joe\_Coconut](https://forum.mustachianpost.com/u/Joe_Coconut)
#### Post date: [November 28, 2024, 6:19am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/107 "2024-11-28T06:19:32Z")
There is a recent episode on the rational reminder podcast with green and a finance prof randolph.
The stuff green is saying seems to me just ridiculous. He is trying to find a reason for.his active etfs
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### Author:  [@Abs\_max](https://forum.mustachianpost.com/u/Abs_max)
#### Post date: [November 28, 2024, 6:46am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/109 "2024-11-28T06:46:55Z")
@Compounding @Joe_Coconut @dbu
I have seen all of these videos.
But I have a different opinion.
In my view, I think this discussion is not about active vs passive funds. This is easy way for index funds to divert our attention by saying all active funds lose vs index , so.
It’s about active vs passive investing. Active includes active retail investor who buys single stocks and don’t use any funds. Those individual retail investors make a lot of difference because they buy or sell companies based on their fundamentals and don’t buy all the companies in index.
Anyways , I was just sharing what I think. Not trying to stop buying index funds. However I think it’s important for us to keep our minds open.
By definition index needs active to survive. But index is also the reason for active to succumb. Time will tell if the balance is maintained as per theory of efficient markets or we will end up with broken market.
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### Author:  [@Joe\_Coconut](https://forum.mustachianpost.com/u/Joe_Coconut)
#### Post date: [November 28, 2024, 6:58am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/110 "2024-11-28T06:58:01Z")
I agree.
Just sometimes we need to be careful not to overthink and overoptimize. I am definitely guilty of this but try to mitigate as much as possible
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### Author:  [@Mirager](https://forum.mustachianpost.com/u/Mirager)
#### Post date: [November 28, 2024, 8:00am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/112 "2024-11-28T08:00:00Z")
What makes you so sure? I think it’s been covered before, it’s not necessarily that active investors lose money, it’s just that after fees it’s hard to outperform the market for long stretches of time. Edit: active investors don’t need fees, either, I meant active funds. But active investing needs work, and that’s a “fee” too!
In what scenario would you or I as passive investors (if you’re passive, I am) actually gain from another’s losses, given passive means no trading? Ie at any given time in a trade there is a definitive winner and loser, but neither knows who will be the winner, otherwise they’d never trade in the first place. The outcome is only known after the trade, or even never - ie both walk away feeling good about themselves and never look back.
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### Author:  [@anon17469660](https://forum.mustachianpost.com/u/anon17469660)
#### Post date: [November 28, 2024, 10:03am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/114 "2024-11-28T10:03:12Z")
I’ll throw in my usual wrench: most passive is rules based active plus index committee magic fairy dust sprinkled on top.
(Out)Performance is a result of these “passive” funds attracting a lot more inflows than smaller “active” funds since they’re in just about every retirement account and then some.
E.g. the S&P 500 added Palantir, Dell and Erie Indemnity and removed American Airlines, Etsy and Bio-Rad Laboratories on September 23 2024.
Decisions are made _quarterly_ by the S&P U.S. Index Committee, a group of analysts who assess potential additions or deletions based on certain criteria.\* The process _involves subjective judgment_ to ensure the index accurately reflects the market’s economic health.
The MSCI indices are mostly rebalanced _monthly_. In November 2024 22 securities were added to and 57 securities were deleted from the MSCI ACWI Index. The three largest additions to the MSCI World Index measured by market capitalization were Spotify Technology (Sweden), Carvana A (USA) and Cvc Capital (Netherlands).
MSCI details its framework for index governance [here](https://www.msci.com/our-solutions/indexes/making-complex-simple/index-governance) and it sports five key index governing principles where the first one is described as _“Expert-led decision-making committees: Captures excess returns to stocks that have low prices relative to their fundamental value”_ [sic!].
I personally don’t believe these expert index committees are particularly great at ~~stock picking~~ actively selecting companies for their index and instead feel that the index outperformance stems mostly from the relentless bid of inflows.
And yes, beating, or even keeping up with the index is hard.
But perhaps, that’s not your personal goal of your portfolio?
YMMV.
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\* Market cap, liquidity, domicile, financial viability, sector representation, public float, etc.
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### Author:  [@PhilMongoose](https://forum.mustachianpost.com/u/PhilMongoose)
#### Post date: [November 28, 2024, 10:29am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/115 "2024-11-28T10:29:42Z")
> [@anon17469660](#):
>
> index outperformance stems mostly from the relentless bid of inflows
Exactly. We saw this also with ARK funds and bitcoin.
The question is how long these flows will be sustained and if/when they will reverse?
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### Author:  [@Mirager](https://forum.mustachianpost.com/u/Mirager)
#### Post date: [November 28, 2024, 10:40am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/116 "2024-11-28T10:40:09Z")
> [@anon17469660](#):
>
> (Out)Performance is a result of these “passive” funds attracting a lot more inflows than smaller “active” funds since they’re in just about every retirement account and then some.
Not sure I understand that, but the originally funny thread is developing into an interesting conversation and for that I’m happy about.
Are you saying - as I’d thought myself before - that pensions funds and retirement accounts are essentially pushing the ETFs’ and mutual funds’ NAV (not wanting to use “price”) up, and in turn the requirement to utilize the cash inflows bids underlying asset prices up?
Edit: wherever there’s a seller there’s a buyer, though, so the outcome should be net zero unless the buyers much outnumber the sellers, which can be the case with retirement accounts and pensions funds playing in the trillions category.
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### Author:  [@anon17469660](https://forum.mustachianpost.com/u/anon17469660)
#### Post date: [November 28, 2024, 10:53am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/117 "2024-11-28T10:53:17Z")
> [@Mirager](#):
>
> Are you saying - as I’d thought myself before - that pensions funds and retirement accounts are essentially pushing the ETFs’ and mutual funds’ NAV (not wanting to use “price”) up, and in turn the requirement to utilize the cash inflows bids underlying asset prices up?
Yes, essentially.
And the more “popular” the ETF the more inflows.
Where some ETFs are only temporarily popular (ARKK et al) while others are mostly always popular (like the S&P 500 or the MSCI World).
Oh, and sorry for derailing your thread … 😅
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### Author:  [@anon17469660](https://forum.mustachianpost.com/u/anon17469660)
#### Post date: [November 28, 2024, 3:23pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/119 "2024-11-28T15:23:52Z")
Nice, thanks for linking!
Summary\* for my fellow investors in a hurry:
> “The ECB article discusses the growing trend of passive investing in equity markets, particularly its implications for financial stability in the euro area. It highlights three key concerns: increased co-movement of stock returns, heightened market concentration, and liquidity clustering. While passive investing offers cost benefits to individual investors, its broader adoption could amplify systemic risks due to benchmark-driven trading patterns and concentrated asset flows. The euro area is affected indirectly via significant U.S. market exposure.”\*
Other interesting gems for me:
- cumulative passive flows now about _twice_ the size of active flows (USD 4 vs 2 … ahem, trillions?!?)\*\*
- passive AUM now somewhere between 55% and 60% of total AUM
(somewhere between 30% and 40% in 2014, ten years ago)
- “Passive investing may increase co-movement among stock returns, **making markets _more_ volatile.**
…
Between the first quarter of 2010 and the first quarter of 2024, a 1 percentage point increase in the passive ownership share of a euro area stock was associated with an increase of around 0.005 in the correlation coefficient with the EURO STOXX index. Therefore, **a continued shift towards passive investing is likely to undermine the benefits of diversification for investors** , making the performance of their portfolios more volatile.”\*\*\*
- “… continued inflows may increase the market capitalisation of the biggest entities, taking their index weights even higher and ensuring a larger share of demand from passive funds going forward. This, in turn, might increase the concentration of market capitalisation and make equity markets more susceptible to idiosyncratic risks from the largest companies.”
But also keep in mind that these are findings from _economists_,\*\*\*\* and to add insult to injury, _ECB_ economists.
Thanks to their ECB credentials benefit, we at least cannot accuse them of talking their book, like Mike Green does, perhaps.\*\*\*\*\*
😉
* * *
\* This summary was mainly produced with human intelligence (Goofy copy&pasting the URL into ChatGPT and asking for a summary ...).
\*\* My personal plan is to fix this in a timely manner. Please stand back for safety reasons.
\*\*\* Personally speaking, as a stock picker, I like volatility (in prices) as it allows for more buying opportunities. Of course, systemically speaking, it might not the best thing (e.g. if central banks have to step in to save markets like in the GFC or so).
\*\*\*\* Goofy apologizes to any economists reading this: economists in this forum are of course an entirely different species and exempt from any accusations of them just being just … ahem, working in the social science field focusing on the economy. 😇
\*\*\*\*\* I personally don’t think he does, but who knows.
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### Author:  [@afstand](https://forum.mustachianpost.com/u/afstand)
#### Post date: [November 28, 2024, 7:46pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/120 "2024-11-28T19:46:37Z")
Although i don’t buy the seriousness of Mike Green’s arguments, the argument that vastly wrong stock prices provide a huge opportunity for active might be incorrect. Hypotetically, if we approach a frontier of say 90% indexing (explicit or closet), there may not be competent active traders at that stage. With whom will they trade? They’d need a sucker to profit from, and the sucker has left to indexing.
Fortunately, we are still far from that hypothetics.
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### Author:  [@Abs\_max](https://forum.mustachianpost.com/u/Abs_max)
#### Post date: [November 28, 2024, 8:12pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/121 "2024-11-28T20:12:25Z")
I actually don’t know if 90% is the limit.
In my view the limit is most likely smaller than that. But I don’t know where that number is.
When there is a “no questions asked” fund money coming every month, the stock has a higher chance of finding a buyer. This is specially true for large companies in index. Which active investor should bet against such stock? It’s like fighting against a tidal wave. Most likely active folks would move to less famous stocks to generate alpha & maintain market weight for top companies in indexes.
I heard that recently Dutch pension fund also moved to index investing. US pension funds were already heavy on index. And of course then we have S&P 500 loving retail investors and the closet active funds.
Fortunately Buffet, Norwegian fund, China sovereign fund and some other big funds are still active. And of course we still have individual active investors (like @anon17469660) to keep things in balance for now 🙂
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### Author:  [@Cortana](https://forum.mustachianpost.com/u/Cortana)
#### Post date: [November 28, 2024, 8:42pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/122 "2024-11-28T20:42:23Z")
Why shouldn‘t the market stay efficient if 99.9% is invested in index funds? The remaining 0.1% active traders will still make the prices. It will be probably even more accurate than millions of people randomly trading.
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### Author:  [@Abs\_max](https://forum.mustachianpost.com/u/Abs_max)
#### Post date: [November 28, 2024, 8:51pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/123 "2024-11-28T20:51:07Z")
How would that play out?
If there are 99.9% buy order and 0.1% (active buy it sell orders). What would be the price of the security?
I think we are seeing this live for Bitcoin. Even though there is no clear idea of what price should be . Over the years the price keep going up due to higher number of buyers versus sellers
Sometimes I feel that we are fed with same info again and again - market efficiency , elasticity , we don’t need more than 10% active to set the price , etc etc.
A dead investor cannot set the price because let’s say they are dead 💀
% ownership of passive could be high as wouldn’t matter much. Maybe even 90%
But % of daily trades is what matters. Not sure if there are any reports for this for recent times.
Found this [video](https://youtu.be/XDR9RDFXp-w?feature=shared) by chance . Have some points from either side of debate
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### Author:  [@Tony1337](https://forum.mustachianpost.com/u/Tony1337)
#### Post date: [November 28, 2024, 8:52pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/124 "2024-11-28T20:52:01Z")
Because of sheer amount of flows. The actives dont have anything to sell if all the 401ks keep relentlessly flowing money to buy everything
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### Author:  [@Wolverine](https://forum.mustachianpost.com/u/Wolverine)
#### Post date: [November 28, 2024, 8:55pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/125 "2024-11-28T20:55:04Z")
In that scenario, the competition would be between stocks as an asset class and other investing opportunities. Either stocks justify their value relatively to other opportunities and buying them even at very inflated prices keeps making sense (because there is no alternative) or they don’t and other investing opportunities should start thriving, with potentially passive, indexed ways to invest in them getting on the rise, balancing things out.
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### Author:  [@anon17469660](https://forum.mustachianpost.com/u/anon17469660)
#### Post date: [November 28, 2024, 8:56pm UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/126 "2024-11-28T20:56:07Z")
Not sure if you are serious?
USD 99 trillion and 900 billions have been invested passively in index funds. The remaining 100 billions in active investors have a slightly different optinion. They can move prices at the margin with their 100 billion budget.
At month end (at the latest) another 100 billion (or maybe just 50 billion, or maybe actually 150 billion or maybe 200 billion) passively enter the market, pounding on the relentless bid.
The 100 billion from active investors? They just wouldn’t matter, except for our amusement and speculation here.
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### Author:  [@Helix](https://forum.mustachianpost.com/u/Helix)
#### Post date: [November 29, 2024, 11:17am UTC](https://forum.mustachianpost.com/t/bubble-in-passive-investment-funds/2501/128 "2024-11-29T11:17:03Z")
Buying market index funds is an active bet on the market and increases the value of the market relative to other investments. This can be a bubble.
If the index is constructed well (maybe free-float market cap weighted), it will impact the prices equally, leaving no (additional) opportunity for arbitrage within the index.
If intelligent active capital is too small to arbitrage inefficiencies from “passive” index investment and dumb active investment, their return will increase. They will outcompete other investors and their wealth share will grow until all inefficiency is arbitraged (at least) down to friction constraints.
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