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Burry's point is not that a lot of indexed stocks are relatively illiquid and thus index funds would have a hard time getting out of them in a serious downturn.
by blacksqr 7y ago
Burry's point is not that a lot of indexed stocks are relatively illiquid and thus index funds would have a hard time getting out of them in a serious downturn.
His point is that the index funds don't own the stocks at all; they trade derivatives like futures and CDO's that mimic the movement of the stocks in leveraged fashion, and the more people who dump their money into index funds without doing their own research, the more leveraged the funds become.
He's warning that in the next serious downturn, over-leverage may cause cascading collapse of index funds and the economy with them, like it did in the mortgage finance crisis.
- ng12 7y ago> His point is that the index funds don't own the stocks at all What? Where did you see that? Not only do the index ETF issuers own the stock but I believe they are legally obligated to do so.
- blacksqr 7y ago"Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008."
- gniv 7y agoThe keyword there is "help". They use derivatives to handle the daily fund flows. They should be a tiny percentage of the whole fund value.
- beezle 7y agoIWM, the largest of the Russel 2K ETFs with $38B cap has exactly 0.14% in cash/derivatives ($53.7M) https://www.ishares.com/us/products/239710/ishares-russell-2000-etf https://www.ishares.com/us/products/239710/ishares-russell-2...
- Torn 7y ago> His point is that the index funds don't own the stocks at all This is misleading, I think. Depends on the fund. Some seek to match the benchmark through a certain exposure to derivatives and synthetic things. Others hold the stocks in proportion. The vanguard funds I'm invested in don't have much synthetics - they own the stocks
- daemin 7y agoAs far as I'm aware they also have flexibility in when they sell or buy stocks, so they don't need to buy them the second you move money in etc.