Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Why Index Funds Are Like Subprime CDOs

bloomberg.com

Post reply on HN
Print view View original

101–110 of 324 posts

Re: Why Index Funds Are Like Subprime CDOs

#101

Post by markbnj »

blankaccount wrote: post #74
markbnj wrote: post #58

Not knowledgeable on these matters, so my money is in index funds. Obviously a lot of other people are in the same category as myself. The article seems to be saying we'd all be better financial citizens if we put our money into actively managed funds, or did our own investing. The latter is out of reach for most people, and with respect to the former it's somewhat puzzling that managed funds can't consistently outpe…

The article is claiming that index funds are an overhyped bubble, so of course they'll out perform actively managed funds that have better liquidity.

> so of course they'll out perform actively managed funds that have better liquidity

I don't get this at all. So why aren't active fund managers investing in the same stocks the index funds are buying in order to take advantage of the price increase for their investors? Isn't that their job? And what do you mean by "better liquidity?"

Re: Why Index Funds Are Like Subprime CDOs

#102

Post by TheCoelacanth »

whatok wrote: post #52
TheCoelacanth wrote: post #25

Earlier quoted context omitted.

It should be self-regulating, though. The higher the portion of the market that is passively investing, the easier it should be to beat their returns by actively investing so the more incentive there will be to actively invest.

Once indexing gets to be a certain size, you run into the "markets irrational longer than you can stay solvent" issue at a much higher level. Active management "correction" doesn't really work if active managers are a much smaller portion of the market or no longer around at all.

You're only taking into account making money via stock trading. There is always the option of buying a company to actually run it for a profit which is not reliant on the market's belief in the company's value.

Re: Why Index Funds Are Like Subprime CDOs

#103

Post by avvt4avaw »

davidw wrote: post #15
avvt4avaw wrote: post #9

Earlier quoted context omitted.

You only need the marginal investor to be informed, so it's not clear that you couldn't have a much higher percentage of passive investment (say 90%) and only a small amount of active investors who are providing price discovery. The bigger problem is that most passive investments are not really passive - for example, choosing to invest in a "passive" S&P 500 ETF over a "passive" Russell 2000 ETF is an "active" invest…

This lists 3575 stocks among its holdings, which includes both large and small cap stocks: https://investor.vanguard.com/mutual-funds/profile/overview/...

Sure, which is why I said that _most_ passive investments are not really passive. Vanguard Total Stock Market is pretty passive, as long as you consider your investment universe to be "US stocks".

But even in this case the fund only holds stocks (no bonds or real estate) and only US stocks at that (no international or emerging market exposure).

Re: Why Index Funds Are Like Subprime CDOs

#104

Post by swsieber »

0xcafecafe wrote: post #93
markbnj wrote: post #58

Not knowledgeable on these matters, so my money is in index funds. Obviously a lot of other people are in the same category as myself. The article seems to be saying we'd all be better financial citizens if we put our money into actively managed funds, or did our own investing. The latter is out of reach for most people, and with respect to the former it's somewhat puzzling that managed funds can't consistently outpe…

I think his point is that most index funds are weighted towards large caps and ignore small ones. With more and more money pouring in, it creates an inflation in value there whereas the small caps get ignored. That is the most logical interpretation I can draw out of his statement (although I am a 100% index investor myself).

Huh. I thought standard index fund advice was to split up you investments. I have 25% (of my investments) in a small cap fund. Does that count as ignored, or am I an outlier?

Re: Why Index Funds Are Like Subprime CDOs

#105

Post by turk73 »

nradov wrote: post #20
5822130027 wrote: post #6

Earlier quoted context omitted.

All types of investment in every country is subject to financial repression. You could own gold, but wait ! any gain is taxed as income ( not capital gain ). Carrying it around has stiff penalties. "You invest in how we say you invest" - Uncle Sam.

Taxes aren't repression.

Taxes are involuntarily extracted at gunpoint. Is that not coercive?

Re: Why Index Funds Are Like Subprime CDOs

#106

Post by omarhaneef »

A lot of people seem to have read this and think that Burry is worried that the indices are weighted by market cap. That is not the issue.

The issue is that a large proportion of the index is smaller caps that no one bothers to look at and price properly, and yet massive amounts of money are in ETFs and other contracts that take a position on those smaller, less followed names.

So these small names in the large index have been artificially driven up. Sort of like CDOs. You just look at the rating, or the P/E of the 500 stocks in the SP500, but you don't bother to do a deep dive.

Were someone to do the deep dive, you would see that they are massively overvalued (and therefore so is the SP500, for instance).

Re: Why Index Funds Are Like Subprime CDOs

#107

Post by markbnj »

0xcafecafe wrote: post #93
markbnj wrote: post #58

Not knowledgeable on these matters, so my money is in index funds. Obviously a lot of other people are in the same category as myself. The article seems to be saying we'd all be better financial citizens if we put our money into actively managed funds, or did our own investing. The latter is out of reach for most people, and with respect to the former it's somewhat puzzling that managed funds can't consistently outpe…

I think his point is that most index funds are weighted towards large caps and ignore small ones. With more and more money pouring in, it creates an inflation in value there whereas the small caps get ignored. That is the most logical interpretation I can draw out of his statement (although I am a 100% index investor myself).

It seems like that point doesn't stand, though. In the boggleheads thread linked elsewhere several posters seem to show that there is actually more small cap diversity in the index funds.

Re: Why Index Funds Are Like Subprime CDOs

#108

Post by motbob »

So there are two concerns here. One concern is a problem with a certain asset being inflated, in this case S&P 500 stocks, and the money you might lose if you hold those assets and their value goes down to normal. A second concern is the collateral effects of a bubble bursting: the inflated assets are tied into many other assets/instruments, and untangling the mess caused by a rapid bubble burst may cause a financial crisis. The panic of 2007 (or at least, the liquidity freeze part of it) was not directly caused by devalued assets, but rather the fact that banks relied on those assets having a certain value to do basic, short-term lending, and their confidence in that value was blown away.

The second concern is not really a concern for long-term investors. Really, neither is the first. Maybe equity is inflated, but where else are we going to put our money?

I think that this article is mostly about risk. If you are not too concerned with risk in your investments (which you should not be if you are more than 10 years before retirement, probably), I think this article doesn't say much about what you should do with your money.

Re: Why Index Funds Are Like Subprime CDOs

#109

Post by agilebyte »

wcunning wrote: post #77
jpmattia wrote: post #51

Earlier quoted context omitted.

Most folks here are focusing on Burry's comments regarding price-discovery. However there is another huge point: Liquidity risk. To understand his point, you have to know the gory details of how an ETF operates. First: When you buy a ETF share for the S&P 500 (iShares, Vanguard etc), the share is not backed by all 500 S&P components. Virtually all the large-number component ETFs are using a sampling of shares to matc…

This feels like the most concise explanation of the underlying mechanics that I was intuiting from the article. Now the question becomes: how do I hedge out of this risk without going full day-trader?

There is a range of active - passive even within ETFs that are trying to perform like an index. An example of this in Canada is say Horizons vs Vanguard that's "fully" passive. You pay higher fees for someone else to do the hedging (= protection from having your money in a passively managed ETF that has underlying assets that don't have a high trading volume) for you.

Re: Why Index Funds Are Like Subprime CDOs

#110

Post by Digory »

jpmattia wrote: post #51
throwaway713 wrote: post #4

Can someone who understands investing well explain what he’s saying in terms that someone who isn’t knowledgeable about this could understand? I kind of think he’s saying that everyone is just shoveling their money into index funds without thinking about it and this leads to incorrectly valued stock that will correct in the form of a crash at some point. Is that sort of the gist of it?

Most folks here are focusing on Burry's comments regarding price-discovery. However there is another huge point: Liquidity risk. To understand his point, you have to know the gory details of how an ETF operates. First: When you buy a ETF share for the S&P 500 (iShares, Vanguard etc), the share is not backed by all 500 S&P components. Virtually all the large-number component ETFs are using a sampling of shares to matc…

Yes, the liquidity risk seems the more interesting piece.

He seems to say that if you have trillions of dollars in ETFs, you should be seeing more volume in the shares in these indexes than we actually observe.

So some of this cash is going toward synthetics -- mathematical models that are supposed to mimic the underlying securities -- and not the actual stocks in the index.

In a general rout, the synthetics won't perform like you'd expect them to. Prices might eventually clear, but it's not "as good as cash" like many investors assume.

Post reply on HN