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As I read it, the word bubble in the Burry interview was really just used for clickbait purposes - his argument wasn't so much that index funds are overvalued,

As I read it, the word bubble in the Burry interview was really just used for clickbait purposes - his argument wasn't so much that index funds are overvalued, it was that there's opportunity in small caps because they're underrepresented in index funds, and everyone else is investing in index funds.

kjs3 7y ago
I don't think so (although bubble is clearly a loaded term). As I understand it, the other part of Burry's argument is that the passive funds distort the market such that if there's a rush for the door there wouldn't be sufficient liquidity to prevent a crash.
mrfredward 7y ago
The Bloomberg article mixed Bury's words and the author's words quite a bit, and I'm beginning to wonder if the whole reason we're having this discussion is because some important nuance was lost. It's hard to see why Mom and Pop buy and hold index investors should care about the liquidity risk Bury talks about...market cap weighted funds will be fine in the long run because the ratio of each underlying stock to a fund share will be constant through the temporary price fluctuations...so no money is lost if the price crashes and then comes back to the same sport shortly after. Perhaps there are other market participants who are leveraged and would find themselves insolvent if indexes cause a liquidity problem? I just don't see how the fund investors themselves would be hurt if underlying stock prices went out of whack for an afternoon.
- laminarflow 7y ago
  I agree with your views, but anecdotally, my worry is about how many of those Mom and Pop investors bought the index funds specifically because the index funds have recently performed well; and of that faction, how much of the capital allocated to index funds was pulled from other sources, causing those sources to fall in value? The data would also support that on a dollar-weighted basis, most index fund investors are not really buying-and-holding: "Turnover rates for two of the most popular ETFs are higher than 3500%(!), an average holding period of about a week. That is dozens of times greater than the trading liquidity of even its most liquid constituents" http://www.grantspub.com/files/presentations/Grant's%20Conference_Oct%204%202016_Steven%20Bregman_Final[2].pdf http://www.grantspub.com/files/presentations/Grant's%20Confe...
throw0101a 7y ago
> his argument wasn't so much that index funds are overvalued, it was that there's opportunity in small caps because they're underrepresented in index funds, and everyone else is investing in index funds. Which index fund though? If you're talking about VOO, which follows the S&P500, maybe. If you're talking about VTI (CRSP US Total Market Index), probably less so. See also Russell 3000 and Wilshire 5000.
- awillen 7y ago
  Well inasmuch as he's talking generally about index funds and where money is going, he's going to be talking about the major ones, like those that track the S&P.
  - throw0101a 7y ago
    Yes, though Vanguard themselves have supposed stopped offering VOO internally as part of their employee 401(k) plans, and changed over to VTI. * https://www.marketwatch.com/story/vanguard-thinks-its-own-employees-should-own-this-fund-not-the-sp-500-theyre-right-2018-06-08 https://www.marketwatch.com/story/vanguard-thinks-its-own-em... VTI has become the third ETF to pass US$ 100B in assets: * https://www.cnbc.com/2018/09/11/most-investors-choose-sp-500-as-their-best-long-term-stock-bet-but-vanguard-move-shows-that-may-be-wrong.html https://www.cnbc.com/2018/09/11/most-investors-choose-sp-500... SPY (a competitor to VOO) is the biggest though, and it follows S&P 500.

kjs3 7y ago

I don't think so (although bubble is clearly a loaded term). As I understand it, the other part of Burry's argument is that the passive funds distort the market such that if there's a rush for the door there wouldn't be sufficient liquidity to prevent a crash.

mrfredward 7y ago

The Bloomberg article mixed Bury's words and the author's words quite a bit, and I'm beginning to wonder if the whole reason we're having this discussion is because some important nuance was lost. It's hard to see why Mom and Pop buy and hold index investors should care about the liquidity risk Bury talks about...market cap weighted funds will be fine in the long run because the ratio of each underlying stock to a fund share will be constant through the temporary price fluctuations...so no money is lost if the price crashes and then comes back to the same sport shortly after. Perhaps there are other market participants who are leveraged and would find themselves insolvent if indexes cause a liquidity problem? I just don't see how the fund investors themselves would be hurt if underlying stock prices went out of whack for an afternoon.

laminarflow 7y ago
I agree with your views, but anecdotally, my worry is about how many of those Mom and Pop investors bought the index funds specifically because the index funds have recently performed well; and of that faction, how much of the capital allocated to index funds was pulled from other sources, causing those sources to fall in value? The data would also support that on a dollar-weighted basis, most index fund investors are not really buying-and-holding: "Turnover rates for two of the most popular ETFs are higher than 3500%(!), an average holding period of about a week. That is dozens of times greater than the trading liquidity of even its most liquid constituents" http://www.grantspub.com/files/presentations/Grant's%20Conference_Oct%204%202016_Steven%20Bregman_Final[2].pdf http://www.grantspub.com/files/presentations/Grant's%20Confe...

throw0101a 7y ago

> his argument wasn't so much that index funds are overvalued, it was that there's opportunity in small caps because they're underrepresented in index funds, and everyone else is investing in index funds. Which index fund though? If you're talking about VOO, which follows the S&P500, maybe. If you're talking about VTI (CRSP US Total Market Index), probably less so. See also Russell 3000 and Wilshire 5000.

awillen 7y ago
Well inasmuch as he's talking generally about index funds and where money is going, he's going to be talking about the major ones, like those that track the S&P.
- throw0101a 7y ago
  Yes, though Vanguard themselves have supposed stopped offering VOO internally as part of their employee 401(k) plans, and changed over to VTI. * https://www.marketwatch.com/story/vanguard-thinks-its-own-employees-should-own-this-fund-not-the-sp-500-theyre-right-2018-06-08 https://www.marketwatch.com/story/vanguard-thinks-its-own-em... VTI has become the third ETF to pass US$ 100B in assets: * https://www.cnbc.com/2018/09/11/most-investors-choose-sp-500-as-their-best-long-term-stock-bet-but-vanguard-move-shows-that-may-be-wrong.html https://www.cnbc.com/2018/09/11/most-investors-choose-sp-500... SPY (a competitor to VOO) is the biggest though, and it follows S&P 500.