Americans have invested more than 7 trillion dollars in Index funds.
Do you possess Index fund or commonly known as ETfs Exchange traded funds as a part of your investment portfolio? A large number of people in our circle do so, our friends, our family members, and colleagues almost everyone is invested in ETFs in one form or an other. What if I tell you that we are about to experience a massive Index Fund market bubble? The most invested ETF is about to suffer a huge bubble burst. This is what Michael Barry, one of the legendary investors said in one of his recent tweets.
So far the success ratio of Michael burry is 90%. In early 2021 he predicted huge inflation and warned investors about the incoming stock market crash, since than market is down 30% from its height. And when market started to rally again, he warned everyone and called it a dead cat bounce. He openly announced that he has sold everything. You would be surprised to know that, two weeks after his tweets market went down almost 20%. Now once again he is predicting another crash.
“Difference between now and 2000 is the passive investing bubble that inflated steadily over the last decade. All theatres are overcrowded and the only way anyone can get out is by trampling each other. And still the door is only so big.”
Now question is, what did he mean by this? Could an innocent market tracking index fund actually bring the entire stock market down? Let us try to find it out.
By purchasing a market tracking index fund, you are actually buying the stock which represents diversification across the overall market. For instance, the biggest of these index fund is SP 500 Index Fund. Buying these shares is a small representation of ownership of largest 500 companies in the United States.
The idea is that by purchasing the index fund, we will get the same return as the market over the time. It is a return which history shows is not shabby but quite stable. It is 10% annually for the SP 500 in long run. It is the astoundingly amazing history of annual returns along with the simplicity and ease of implementing this strategy, passive investing gained popularity. According to a Bloomberg’s intelligence study, on average, more than 20% of SP 500 shares of each company have been observed to be successfully held via passive instruments.
For instance, back in year 2003, 3.3% of the market constituted the passive structures. Currently these numbers are at higher end. Now the question is whether this dominant passive investment is good for market? Michael thinks it is concerning.
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