3 ms·

I think the parent comment was suggesting stocks could be a in a bubble due to the popularity of ETFs/index funds.

pedrocr 9y ago
That can only be the case if people are moving money from other assets into stocks because of index funds. Maybe that's happening (less CDs perhaps?) but the argument for indexing is much more "stop buying expensive managed stock funds and use much cheaper stock index funds". And that shouldn't create a bubble in stocks because there is no more capital invested in total.
exelius 9y ago
Equity bubbles are nothing new. I do think we're in a bit of a bubble (not a huge one, but the market is overvalued right now IMO) but again, the market is cyclical and I expect we'll enter bear market territory again soon. But on the other side of every equity bubble are hedge funds looking to short sell the crap out of everything. Once those guys start making money again, we'll know the bubble has burst. Also, 10-year T-bills still exist if you're afraid of an equity bubble. Returns are historically bad, but they've always been used as more of a safe haven to stash money during a downturn than anything else. The fed is raising rates again, which will likely end up cooling off the equity market.
cko 9y ago
Yes, that was one concern. pedrocr's reply below (in addition to all the other comments) makes sense - if the current inflow in passive funds is just active funds being sold and reallocated, doesn't seem too bubbly. Though I am an active reader in the early retirement / Financial Independence blogosphere, and the real life people I talk to (usually nerds) are like 'Vanguard or gtfo'. So it would seem like the average person, and especially Baby Boomers looking for 'safe returns', would think "well, everyone's recommending it so it's all good" and voila, hundreds of billions flowing in. On the other hand my coworkers, most of whom wont read a book to save their lives, are just happy there is employer matching on their 401Ks. I suspect that's more representative of the average population. Not sure the data on this. Also, would the share price of these passive funds go up due to demand enough to cut significantly into returns? Like a 30% increase in share price just because everyone is jumping on the bandwagon takes a while to make up for. (Am I wrong? How much exuberance would it take to bubble up an ETF's share price significantly?) Thanks for all the replies, though. I'm looking for both sides of the argument. The businessinsider article supporting the 'bubble view' was a quick read but too light on substance.
- wbl 9y ago
  ETF arbitrage pins them to the basket they hold pretty well.
- fennecfoxen 9y ago
  > Also, would the share price of these passive funds go up due to demand enough to cut significantly into returns? Like a 30% increase in share price just because everyone is jumping on the bandwagon takes a while to make up for. You can look up ETF-price-to-asset-price ratios. For example: https://finance.yahoo.com/quote/IVV https://finance.yahoo.com/quote/IVV Right now the price is listed as $245.48 and the NAV is $243. That's a 1% difference and honestly I wouldn't be surprised if some of that is Yahoo's NAV price estimate being stale because someone has automated the conversion of the price difference into free money using computers. Probably multiple someones.

That can only be the case if people are moving money from other assets into stocks because of index funds. Maybe that's happening (less CDs perhaps?) but the argument for indexing is much more "stop buying expensive managed stock funds and use much cheaper stock index funds". And that shouldn't create a bubble in stocks because there is no more capital invested in total.

exelius 9y ago

Equity bubbles are nothing new. I do think we're in a bit of a bubble (not a huge one, but the market is overvalued right now IMO) but again, the market is cyclical and I expect we'll enter bear market territory again soon. But on the other side of every equity bubble are hedge funds looking to short sell the crap out of everything. Once those guys start making money again, we'll know the bubble has burst. Also, 10-year T-bills still exist if you're afraid of an equity bubble. Returns are historically bad, but they've always been used as more of a safe haven to stash money during a downturn than anything else. The fed is raising rates again, which will likely end up cooling off the equity market.

cko 9y ago

Yes, that was one concern. pedrocr's reply below (in addition to all the other comments) makes sense - if the current inflow in passive funds is just active funds being sold and reallocated, doesn't seem too bubbly. Though I am an active reader in the early retirement / Financial Independence blogosphere, and the real life people I talk to (usually nerds) are like 'Vanguard or gtfo'. So it would seem like the average person, and especially Baby Boomers looking for 'safe returns', would think "well, everyone's recommending it so it's all good" and voila, hundreds of billions flowing in. On the other hand my coworkers, most of whom wont read a book to save their lives, are just happy there is employer matching on their 401Ks. I suspect that's more representative of the average population. Not sure the data on this. Also, would the share price of these passive funds go up due to demand enough to cut significantly into returns? Like a 30% increase in share price just because everyone is jumping on the bandwagon takes a while to make up for. (Am I wrong? How much exuberance would it take to bubble up an ETF's share price significantly?) Thanks for all the replies, though. I'm looking for both sides of the argument. The businessinsider article supporting the 'bubble view' was a quick read but too light on substance.

wbl 9y ago
ETF arbitrage pins them to the basket they hold pretty well.
fennecfoxen 9y ago
> Also, would the share price of these passive funds go up due to demand enough to cut significantly into returns? Like a 30% increase in share price just because everyone is jumping on the bandwagon takes a while to make up for. You can look up ETF-price-to-asset-price ratios. For example: https://finance.yahoo.com/quote/IVV https://finance.yahoo.com/quote/IVV Right now the price is listed as $245.48 and the NAV is $243. That's a 1% difference and honestly I wouldn't be surprised if some of that is Yahoo's NAV price estimate being stale because someone has automated the conversion of the price difference into free money using computers. Probably multiple someones.