101–110 of 200 posts
Economic systems are feedback loops. If something is the best investment that causes it to become a bad investment in proportion to how rapidly people realize it's a good investment.
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These sections seem to address the point to me: * "The tail is not wagging the dog" - index funds are a relatively small percentage of total share ownership. * "Benchmark huggers have always been around" - owning ~the index was not started with index funds. * "Active funds literally own the market" - the sum of portfolios of non-index funds ends up having the same profile. * "Price discovery is a cop-out" - relativel…
> "Liquidity is not a huge problem for index funds" -no market impact to sell (v dubious if you ask me), unlevered. If you're talking about index mutual funds, then the author is just plain wrong. Any open-ended fund offering daily liquidity will trade, and therefore produce market impact, to meet its daily redemptions. If you're only talking about ETFs, then this is technically correct. Besides the occasional index…
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How would they lose liquidity? Authorized participants [0] are always in the market for ETFs. If an ETF share price is crashing out of line with the index it tracks, they will step in and buy shares, swap them with the ETF issuer for the shares of the underlying stock in the index, and sell those shares for an arbitrage profit. Even if one of the underlying stocks becomes illiquid, a big enough price divergence on al…
Burry's point wasn't that the ETFs would lose liquidity, but rather than the lightly-traded names in the index would. If the index instruments have a lot more liquidity than the underlying names, then that means they won't be able to gracefully absorb the liquidity shocks from an unwind in the index. Here's some back of the envelope calculations. Between SPY, IVV, and VOO alone, there's $500 billion in S&P 500 index…
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OK, but in that case is there a distinction between index funds and actively managed funds? Is this a risk that index funds are uniquely exposed to? Also, another thing to keep in mind is that this only affects people who are trying to sell at the bottom. Buy and hold investors care little for liquidity issues during a crash.
> in that case is there a distinction between index funds and actively managed funds? Yes. Active managers can choose what to sell based on prevailing market conditions. Index funds must sell across the board. That could involve getting hosed on names in a short-term squeeze. > this only affects people who are trying to sell at the bottom There are lots of index funds. For a broad-market fund, you're probably right--…
The fund may temporarily depart from its normal investment policies and strategies when doing so is believed to be in the fund’s best interest. ... Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days.
And a lot of index fund investors are buy-and-hold so it's unclear if a recession would even cause a liquidity / redemption crisis.
One question I have about Burry's comments that isn't (directly) addressed in this article relates to Burry's observation that trading volumes are remarkably low relative to the value of assets pegged to the equities being traded. For example, he remarks that over half of the S&P 500 stocks trade under $150 million daily, despite trillions of dollars in assets globally indexed to those stocks. (And he notes that almo…
That would constitute "synthetic indexing" in the sense you are talking about.
I think this article really misses the point that Burry was making, which is that if the indexs see a sell off they won't find the liquidity in the market to cash out their positions and will drive the market down. This article seems to focus on all of the upsides of indexing, which are all true. However, those upsides don't negate the risk that is being pointed to.
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These sections seem to address the point to me: * "The tail is not wagging the dog" - index funds are a relatively small percentage of total share ownership. * "Benchmark huggers have always been around" - owning ~the index was not started with index funds. * "Active funds literally own the market" - the sum of portfolios of non-index funds ends up having the same profile. * "Price discovery is a cop-out" - relativel…
> "Liquidity is not a huge problem for index funds" -no market impact to sell (v dubious if you ask me), unlevered. If you're talking about index mutual funds, then the author is just plain wrong. Any open-ended fund offering daily liquidity will trade, and therefore produce market impact, to meet its daily redemptions. If you're only talking about ETFs, then this is technically correct. Besides the occasional index…
There is already a very well known liquidity problem with index funds that track S&P500. Since stocks come and go from this list, index fund managers need to be very careful about how they buy and share these stocks so as not to greatly effect their prices, and cost the fund too much money.
So index funds already have a pretty big effect in markets. I suspect some of the stretegies used for these events will be similar to how managers mitigate short term mass enters and exits in a fund.
My bigger suspicion in general with index fund mass selling though, is that while they are meant to track the market over the mid to long term, they are actually priced seperate from the market, and this seperate pricing means that if there’s a mass sell off, then fund share prices fall, and others have incentive to buy them at a discount. Eventually both index and benchmark prices reach equilibrium. Maybe there’s total havoc in the market in the meantime, but this mechanism will mitigate it to some degree.
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> in that case is there a distinction between index funds and actively managed funds? Yes. Active managers can choose what to sell based on prevailing market conditions. Index funds must sell across the board. That could involve getting hosed on names in a short-term squeeze. > this only affects people who are trying to sell at the bottom There are lots of index funds. For a broad-market fund, you're probably right--…
There are some escape clauses in Vanguard's index funds: The fund may temporarily depart from its normal investment policies and strategies when doing so is believed to be in the fund’s best interest. ... Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. And a lot of index fund investors are buy-and-hold so it's unclear if a recession would even cause a liquidity / redemption c…
But index funds themselves aren't. They have to sell stock when units are destroyed and vice versa. In addition to other factors, this can result in weird tax effects as well as tracking error to the index.
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Burry's point wasn't that the ETFs would lose liquidity, but rather than the lightly-traded names in the index would. If the index instruments have a lot more liquidity than the underlying names, then that means they won't be able to gracefully absorb the liquidity shocks from an unwind in the index. Here's some back of the envelope calculations. Between SPY, IVV, and VOO alone, there's $500 billion in S&P 500 index…
This is a really good explanation, but you would think market forces would kick in. If a company drops 20% (or even 3%!) from an event that doesn't effect the business itself, you're going to get smart money buying. I'd have a hard time believing some niche hedge fund somewhere wouldn't make a killing off this by providing liquidity. This is under the assumption that there will be capital available to flow, if there…