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ETFs now hold more than $3.1T worth of just top US companies
- SilverElfin 1y agoThe entire system just helps big companies become even bigger and even more anti competitive. Even just due to their existence (being large and existing). Passive investing is good for the general person but also makes this concentration worse and keeps capital away from smaller companies. We need some way to make the small and medium portions of the economy work better.
- GodelNumbering 1y agoI believe the root cause of ALL of this are extremely incumbent friendly policies that took hold in the last few decades in the developed countries.
- js8 1y agoThe incumbent-friendly policies are also called laissez-faire. Turns out, the nature favors the incumbent.
- windowshopping 1y agoAnd yet invasive species flourish all the time.
- ch4s3 1y agoLarge companies generally ask for and build a moat with regulations.
- GodelNumbering 1y agoNo, the nature favors the fittest. The incumbent may or may not be the fittest. The said policies allow the unfit or inefficient businesses to stay around or dominate. While I acknowledge your point of view, a Tesla taking in $38B of government subsidy or a google/apple getting special lenient legal treatment is not laissez-faire.
- Calavar 1y agoFittest is a question of global optimum. Nature favors local optima.
- echelon 1y agoAn invasive species (ie. Google, Amazon, and Apple) can out-compete and starve out an entire ecosystem. Like invasive lionfish, which have no natural enemies in the Florida Keys. Big tech has destroyed the open web. Big tech killed the bookstore. Big tech is now destroying Hollywood. Big tech is becoming your grocery store and primary care. They're guardians that keep small companies from growing big. They can buy them out or threaten to pour billions into out-competing. They're growing into markets they never should have been in, then snuffing out the incumbents. They're making it impossible for new businesses to enter after them. (You try to build a smartphone. There can be only two.) Now they're putting price pressure on employees. They're limiting the upside for entrepreneurs and VC firms. They have all the cards, and they tax us and behave like capricious gods. I'm a capitalist. I think competition is good. But what we have right now isn't a fair playing field. Big tech needs to be broken up to restore the forest to growth. Thankfully YC and a16z are starting to feel the same way and are issuing statements about this rampant, wanton monopolization.
- mgh2 1y agoIt is based on performance too - it may seem that investment is fueling this for now, but at any time if their profits stop, so does the funding.
- js8 1y agoIf you want a level playing field for competition, you need some mechanism that will level it. Whatever that is, clearly not laissez-faire. (I would also say that capitalism is more than a competition of firms, in fact, private ownership of capital is by its nature anti-competitive for citizens.)
- echelon 1y ago
- ekianjo 1y agoIt's not laissez faire. It's lobbying (disguised corruption) at work.
- bigyabai 1y agoIt doesn't really matter what nature likes or dislikes. If even one person is sufficiently corrupt, they can spoil it for incumbents and newcomers alike: https://en.wikipedia.org/wiki/Tragedy_of_the_commons https://en.wikipedia.org/wiki/Tragedy_of_the_commons
- sanex 1y agoBailouts for auto companies big banks and airlines, etc isn't laissez faire
- AbstractH24 1y agoNo, but the collateral damage in letting it all burn to the ground overnight is also a problem. The bailouts aren’t/weren’t problems. Failing to hold big companies and their leaders accountable for risks they took not paying off in a way that doesn’t disrupt low level people is.
- sanex 1y agoAgree it's not great, and I still drive Chevy's, but laissez-faire capitalism isn't what's keeping a lot of these big legacy companies alive. Tech companies I think might be a different dynamic.
- AbstractH24 1y agoI was thinking more banks and mortgages than car companies. But in both cases the concern is not just employees, but also direct and indirect investors. But agree, more needs to be done to force innovation and allow for things to “fail gradually” when they neglect to
- noitpmeder 1y agoNature favors _survival_, at any cost
- anonym29 1y agoThere is nothing laissez-faire about intelligence agencies bankrolling "private" startups that help said intelligence agencies circumvent the fourth amendment, nor about the regulatory capture resulting from revolving door between big business and the big government agencies tasked with regulating those businesses, nor about taxpayers bailing out banks or auto companies that made shitty investments or shitty cars, nor about the protectionism of the Jones Act that results in the US producing some of the world's most overpriced naval vessels at the expense of US consumers, nor about the open practice of corporate bribery of the legislature which the US calls "lobbying". The US does not practice laissez-faire capitalism; we practice a pernicious state corporatism where losses get socialized, gains are privatized, where the trillion dollar companies pay lower tax rates than the mom and pop shops, where the federal government spends more resources spying on their own citizens than they do spying on Russia or China, where members of Congress are for sale when they're not insider trading, but where you will get abducted by plainclothes DHS agents and get deported (even with a valid, legal residency) if you so much as dare to publicly criticize Israel or have the wrong skin color while standing outside of a Home Depot. There's nothing "natural" about any of this.
- keeganpoppen 1y agouhhh in what world would that be called "laissez-faire"?
- thescriptkiddie 1y agomaybe replacing everyone's defined-benefit pensions with 401(k)s and IRAs wasn't such a good idea
- IgorPartola 1y agoWhy? Every barber and shoe maker and Uber driver I know are financial wizards that can navigate the stock market as well as the professionals. /s
- lotsofpulp 1y agoWhy do you think the defined benefit fund managers are better than the collective market for preventing concentration? Also, what about the increased risk of corruption leading to underfunded DB pensions? Which is apparently near certain, given that pretty much every defined benefit pension fund across the US is underfunded.
- deleted 1y ago[deleted]
- tick_tock_tick 1y agoNah pensions were always a horrible thing that ruined so many lives. No one's retirement should be bound to the long term success of the company they happened to work for.
- jandrewrogers 1y agoDefined benefit plans are the same thing with misaligned incentives and more middlemen taking a cut. Defined contribution plans didn’t spring out of the ether on their own. They were a reaction to evident rampant risks and deficiencies of defined benefit plans even after many failed attempts at reducing that risk via regulation.
- jltsiren 1y agoDefined benefit pensions are also invested in the market. It would be better to have Social Security with higher income limits, and with regular adjustments to contributions and retirement ages to ensure that the system is in balance. And something like IRA on top of that. Then you would have two different systems with different failure modes.
- IgorPartola 1y agoYou want to slow this stuff down? We now have the tech for the Fed, the central bank, to give everyone a bank account directly. It is 100% secure because it is issued by the central bank and it has a number of amazing benefits: 1. You earn interest at the Fed’s rate. So basically why would you keep your money with Chase earning 0.25% maybe when you can earn easily 10x that. So everyone pretty much moves to this new system. 2. This eliminated speculation. The banks can no longer turn $1 into $30 by repeatedly borrowing and lending. But it is important to slowly grow the money supply. So the Fed can just no questions asked deposit a predefined sum of money every month into everyone’s account. 3. Your transactions are free and guaranteed. But of course this would cut out a whole lot of banks and other financial institutions out of the loop and so it will never happen.
- boppo1 1y agoWhat are you talking about, "the Fed's rate" 10x what chase offers?
- loeg 1y agoCurrent SOFR (Fed rate) is 4.34%: https://www.newyorkfed.org/markets/reference-rates/sofr https://www.newyorkfed.org/markets/reference-rates/sofr Banks will offer low yield on cash if you don't go looking for better yield, but it's easy enough to find good yield: money market accounts. E.g., VMFXX throws off 4.21%, which is reasonably close to 4.34. (I don't agree with the general thrust of GP's argument, just clarifying on some neutral facts.)
- loeg 1y ago> The entire system just helps big companies become even bigger and even more anti competitive. Even just due to their existence (being large and existing). Passive investing is good for the general person but also makes this concentration worse and keeps capital away from smaller companies. No. There's still plenty of active money doing price discovery; you can't attribute this market concentration to the rise of passive. (And this is self-correcting; as the share of active money shrinks, the reward to active investors for price discovery grows.) The market is concentrated because that's where active money thinks the future profit is.
- plantain 1y agoOr is the active money also in the big companies, because even though there are good opportunities elsewhere, the steady ETF flows just keep pumping the big companies even faster?
- caminante 1y agoTo your point, passive indexing critics who under weighted Nvidia, a single stock, haven't had good runs v. peers. Meanwhile, check out the recent Abivax pop. Drug trial results sent shares to the moon, outperforming the S&P500. Stock picking is so...damn...hard.
- jghn 1y agoThe way I've been looking at this is that when The Big One happens and the average American loses their shirt via the crash of the giant ETFs, the naysayers who managed to have been invested in the things that don't crash will zig when everyone else is zagging. However: between now and then they're likely underperforming as you point out. And when it happens most people who believe themselves to be ziggers will have chosen the wrong zig candidate. I really really worry about the ETF world, but to do anything else puts me at even higher risk.
- BobaFloutist 1y agoAlso the longer you're in an underperforming hedge, the worse the crash has to be and the better your hedge has to perform to be worth it. You could be completely right about a recession/crash, but if you miss it by 5 years, your net outcome could still be worse than if you just sat and rode it out start to finish.
- benreesman 1y agoDo you want a dysfunctional soviet central party planning committee? Because this is how you get a late Soviet central committee.
- CursedSilicon 1y ago"Everything I don't like is COMMUNISM!"
- bigbadfeline 1y ago> Do you want a dysfunctional soviet central party planning committee? I did not write the parent of your comment but I went back to re-read it and I didn't see any hints of central planning. In fact, the parent proposed no solution, it only pointed out a process of continued monopolization which, if unchecked, would lead to something resembling the monopoly of the late Soviet central committee over their economy. In a sense, your comment inverted the meaning of the parent.
- benreesman 1y agoI was agreeing with GP I just didn't annotate my Archer reference well. My bad.
- jppope 1y agoSize is also a disadvantage in a market, growing by 2% when you are a $1M company is easy, growing by 2% when you are a $100B company is hard. Corporate managers have an embedded growth obligation to maintain both their position and the company's position. This is part of the reason they are vulnerable to new market entrants.
- mannyv 1y agoThe history of corporations shows that monopoly or oligopoly is the end result without intervention. And even with intervention scale matters. Example: in smaller countries there are multiple cellphone providers that are essentially identical. They don't compete, really. When a business starts harvesting the economies of scale it also becomes easier to compete against everyone. Then you get the political externalities (nobody gets fired for buying IBM) and real anti-competitive behavior (supplier exclusivity, bribes, tying, discounts, etc). It's practically a natural law.
- transcriptase 1y agoCanada is the prime example of this phenomenon. Rogers, Bell, and Telus are the three companies that own or acquire nearly every internet/mobile/tv property in the entire country. They all offer the exact same plans at the exact same prices, moving in lockstep almost down to the hour when new price or benefit surfaces. Similarly banking is dominated by the big 5 who don’t really compete as far as the average customer is concerned. In many regions groceries are dominated by two companies, while nationally the entire market basically consists of five or so. And because Canadian pension plans and ETFs are so heavily invested in these select few companies, they trudge along with virtually no incentive to upset the status quo because the government finds it easier to oversee oligopolies than allow competition to benefit the populace.
- com2kid 1y agoYou are giving examples of markets where goods and services are commodified. Cellular technology between providers is basically identical now. The nightmare that all cellular providers dreaded, becoming a dumb data pipeline, has happened. Value add services are dead across the board. Telus has a profit margin of around 4%, what sort of innovation are you expecting with those financials?
- transcriptase 1y agoSure. Let’s just pretend collusion and price gouging hadn’t been going on for over 20 years, while the big 3 including Telus assimilated all independently owned competitors and until about 2020 maintained the most absurdly expensive and profitable mobile plans on earth while claiming it was due to infrastructure costs which were actually being subsidized by taxpayers. Oh and while the regulatory body that was supposed to keep them in check, staffed nearly exclusively by former Telus, Rogers, and Bell higher-ups, rubber stamped acquisitions and actively prevented foreign competitors from threatening the gravy train in conjunction with propaganda campaigns from incumbents. Get fucking real. Which one did you work for?
- nradov 1y agoPassive investing doesn't keep capital away from smaller companies. When Nvidia stock rises the company doesn't get that money. If they need more capital then they'll have to issue a secondary offering. Mutual funds don't generally make pre-IPO investments regardless of whether those funds are actively or passively managed.
- fuckaj 1y ago[dead]
- daedrdev 1y agoThis is the end result of uncompetitive active management charging such high fees
- deleted 1y ago[deleted]
- sleepyhead 1y agoNo it's not. Actively managed funds will in most cases not beat an index fund. Investorers have learned this and has chosen passive funds. This together with more people investing in funds has increased the size of passive ETFs in the market.
- daedrdev 1y agoThey don't beat index funds because their fees eat their gains
- deleted 1y ago[deleted]
- const_cast 1y agoThey don't beat index funds because the market is completely unpredictable, and active investors are just delusional and think they can predict it. They can't.
- AbstractH24 1y agoDo you have proof of this over long time horizons? Say 10 or 20 years. And the odds of picking the right managed etf over index fund?
- roncesvalles 1y agoUsually those active managers stay in business by saying they get "superior risk-adjusted returns" even though they didn't outright get better returns. This is, of course, changing the goal post because a portfolio with 90% S&P 500 and 10% cash will also appear "superior risk-adjusted" than 100% S&P 500. Sharpe ratio is the most misunderstood metric invented by humanity.
- deleted 1y ago[deleted]
- dustyharddrive 1y agoIs there a direct indexing service that doesn't have exorbitant fees?
- mtoner23 1y agoVanguard?
- Jaxkr 1y agoFXAIX
- klodolph 1y ago“I want ETFs and low fees” -> https://www.bogleheads.org https://www.bogleheads.org, there are various articles describing which funds to pick. (I’m thinking by “indexing service” you mean index fund?) Bogle was the founder of Vanguard and argued that low fees were better than active management; the “bogleheads” are the community that follow that advice.
- dustyharddrive 1y agoI mean a custom index, but not one of those fintech apps with small limits on the number of stocks.
- klodolph 1y agoAn index fund is a fund that owns a basket of stocks which are weighted by their weight in index. Like, if you have an S&P500 index fund, then for every $1,000 you put in the index, you own, say, $13.30 of WMT, because WMT has a weight of 1.33%. But with some exceptions, you will mostly own stocks in integer amounts. You own one share or zero. That doesn’t give you $13.30 of WMT, that gives you $96.98 of WMT or $0.00 of WMT. Index funds work because the funds are large enough—a fund with $10 million in assets can buy 1,371 shares of WMT at $96.98 for $132,959.58 which is close enough. And then the index fund has to periodically rebalance—the share price of WMT changes, the weighting of WMT in the S&P500 changes, and the fund then has to buy or sell shares of WMT. You could come up with a way to do something like having your own index fund, but it would involve partial ownership of shares, and pooling your assets with people who disagree with you about the way to allocate assets, which makes things more complicated and probably more expensive. My personal take on this is that these more complicated schemes can often end with retail traders getting the short end of the stick. That’s why low-fee ETFs have been so successful. I think if you want a weighting other than what the index fund gives you, then there are ways to do that—maybe these involve some fees, but c’est la vie. You can buy “tilted” ETFs, you can buy exposure to specific stocks or funds, you can hedge exposure to specific stocks or funds. But you are probably going to have a hard time making your own basket with a lot of stocks in it. Retail trading just does not get access to the same strategies that wall street has.
- bandrami 1y agoThis is related to the somewhat troubling fact that globally, shares held exceed shares issued by about 50%. (And before you flee to gold, gold held exceeds gold in existence by about 100%.)
- jandrewrogers 1y agoHow are you defining that? For example, more shares can be borrowed than exist in a company without creating excess shares.
- bandrami 1y agoUntil they're called
- OsrsNeedsf2P 1y agoDo you have a source to back up these claims? A quick search doesn't yield anything
- johnnienaked 1y agoThe next crash is gonna be a doozy
- ArtTimeInvestor 1y agoNot sure if that is due to ETFs. US companies have great reporting. Every quarter you get a nice report with GAAP numbers. In Europe, for example, reporting is less frequent and murkier. Reports often don't even include standardized net earnings. Top US companies like Microsoft, Google, Apple, Nvidia, Tesla, Meta, all have intelligent, driven, forward looking CEOs. Most other companies have CEOs asleep at the wheel. Can anyone name a smaller public company or a public company outside the US with a highly driven, forward looking CEO?
- daft_pink 1y agoETFs are really just mutual funds with better liquidity and more opportunity to trade. I don’t think it should be shocking that they hold so many assets since mutual funds hold an enormous number of assets as well.