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For those who believe that economics has never done anything useful or benefits the common man, here's a small counterclaim. The widespread adoption of index f

For those who believe that economics has never done anything useful or benefits the common man, here's a small counterclaim. The widespread adoption of index funds was absolutely an outgrowth of academic financial economics. In particular the efficient market hypothesis and CAPM theories, as well as empirical research studying the (lack of) performance of active investment managers. In the US alone, index funds now make up more than $3 trillion of assets. That's saving investors more than $30 billion in wasteful fees every single year. (Which doesn't even account for the downward pressure on fees for active funds.) Moreover this revolution has benefited ordinary and small investors the most.

jwatt 7y ago
It no doubt benefits individual investors, but if index funds were to swallow up the market the main benefit of capitalism - the efficient allocation of capital - would at some point arguably be destroyed. That raises the question of whether/when a centrally planned economy would start to outperform such a passive system?
- thekyle 7y ago
  If index funds were to become an inefficient way to allocate capital then their returns would become subpar and money would go elsewhere.
bch132 7y ago
Obviously, this is a completely "free lunch"!!! If we just buy index funds, which preferentially buy any larger company over a smaller company by design, we avoid all those "wasteful fees"! This is a classic "seen" versus "unseen" problem - the "wasteful fees" saved is obvious, but what is unseen here? A couple of options might be: 1. indexing makes uneconomic acquisitions easier - a CEO can make stupid acquisitions to get bigger simply because indexing will bail him/her out as being larger for the sake of being larger and representing a greater portion of the index leads to great investor inflows. 2. smaller companies are hurt because there are fewer active investors to bother to analyze them as they have been crowded out by indexing. This may have "benefited ordinary and small investors the most" thus far, but what happens in the next market crash when indexing investors are rushing for the exits? What has happened to Main Street as a result of the trend towards indexing being firms gain investment simply by being "big"? It is doubtful many will agree with "bigness for the sake of bigness" is a positive development...

jwatt 7y ago

It no doubt benefits individual investors, but if index funds were to swallow up the market the main benefit of capitalism - the efficient allocation of capital - would at some point arguably be destroyed. That raises the question of whether/when a centrally planned economy would start to outperform such a passive system?

thekyle 7y ago
If index funds were to become an inefficient way to allocate capital then their returns would become subpar and money would go elsewhere.

bch132 7y ago

Obviously, this is a completely "free lunch"!!! If we just buy index funds, which preferentially buy any larger company over a smaller company by design, we avoid all those "wasteful fees"! This is a classic "seen" versus "unseen" problem - the "wasteful fees" saved is obvious, but what is unseen here? A couple of options might be: 1. indexing makes uneconomic acquisitions easier - a CEO can make stupid acquisitions to get bigger simply because indexing will bail him/her out as being larger for the sake of being larger and representing a greater portion of the index leads to great investor inflows. 2. smaller companies are hurt because there are fewer active investors to bother to analyze them as they have been crowded out by indexing. This may have "benefited ordinary and small investors the most" thus far, but what happens in the next market crash when indexing investors are rushing for the exits? What has happened to Main Street as a result of the trend towards indexing being firms gain investment simply by being "big"? It is doubtful many will agree with "bigness for the sake of bigness" is a positive development...