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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 bec
by 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 agoI 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...