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> 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). Pas

by 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 ago
Or 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 ago
  To 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 ago
    The 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 ago
      Also 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.
- loeg 1y ago
  No? ETF inflows from passive, market-index funds are evenly distributed across the market, weighted by market cap. They don't concentrate to only the big companies.
  - plantain 1y ago
    Inflows are not evenly distributed across the market. The S&P500 ETF's dominate.
    - loeg 1y ago
      The S&P500 represents 87% of the US market (~$54 of 63T). Inflows to S&P500 funds are evenly distributed among that 87% (by market cap). I think concerns about market concentration are usually expressed about, e.g., the Mag 7 being 31% of the US market (~$19 / 63T) moreso than the next biggest 493 stocks. S&P 500 inflows don't overweight the Mag 7 relative to any other S&P 500 component.
boppo1 1y ago
Yeah maybe if we hadn't quantitative-eased away earnings pain for companies for 15ish years.
what-the-grump 1y ago
Please point to the active money in this economy? The pension reallocations? Blackrock? Bitcoin? There is a ton of money being siphoned off with zero place to put it. When sv collapsed why does Roku park half a billion dollars in a bank account. Roku has 8th of Mazda’s net worth parked in a bank account… there is unchecked capitalization for the sake of the share price, this money is doing nothing except buying up competition.
- ttul 1y ago
  The Roku example perfectly illustrates the deeper issue here - we're seeing a systemic breakdown in capital allocation that goes beyond the passive/active debate. The real problem is a feedback loop: large companies get cheaper capital → they can afford to hoard cash and make defensive acquisitions → this reduces competition and innovation → which paradoxically makes them even "safer" investments → reinforcing their cost-of-capital advantage. Meanwhile, the "missing middle" gets squeezed from both ends. Small companies can access some capital through VC/growth equity, but medium enterprises ($10M-$1B revenue) face a brutal gap. They're too big for most VCs, too small for institutional debt markets, and banks are increasingly consolidated and risk-averse. (I am so personally familiar with the missing middle in my day job) This isn't just about market efficiency - it's about market structure. When a streaming company parks $500M in bank accounts instead of investing in content or technology, that's not rational capital allocation. It's defensive positioning enabled by cheap capital and regulatory capture. There are many many lazy companies sitting on a cash machine structure with no decent ideas on how to grow. Some potential fixes: - Tax policy that penalizes excessive cash hoarding; eliminating the tax deduction on interest would encourage companies to hold less cash by making cash more expansive - Regulatory limits on horizontal acquisitions above certain market share thresholds - Public development banks focused on the missing middle (like Germany's KfW) - Capital gains tax advantages for investments held in companies under certain size thresholds The irony is that this concentration might ultimately hurt passive investors too - less competition means less innovation and slower long-term growth across the entire economy.
  - com2kid 1y ago
    Counterpoint - Nearly every startup I've talked to recently (last year or so) has been cash flow positive after just series A (or sometimes after just a seed round!) Companies are pursuing smart business strategies and prioritizing healthy rates of growth over "hire everyone we can and figure out how to make a profit later". I'm seeing a lot of very focused businesses that are meeting customers demand right away and solving real problems. They aren't billion dollar problems, but they are profitable problems to solve. I wonder how the startup ecosystem will change if VCs start seeing 60% of companies making a healthy profit after a couple years, vs the historical trend of waiting a decade and hoping 1 company strikes it big. 60% of companies growing 10-20x ROI seems ... Not bad? One problem of large mega corps is they don't even bother to go after new ideas that aren't multi-billion dollars markets. It used to be Microsoft would make a bunch of senior engineers filthy rich, they'd go boot strap a new company, and if the idea took off, Microsoft would aquire them again. Some people in the 90s/early 2000s pulled that off multiple times!

by loeg 1y ago

plantain 1y ago

Or 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 ago
To 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 ago
  The 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 ago
    Also 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.
loeg 1y ago
No? ETF inflows from passive, market-index funds are evenly distributed across the market, weighted by market cap. They don't concentrate to only the big companies.
- plantain 1y ago
  Inflows are not evenly distributed across the market. The S&P500 ETF's dominate.
  - loeg 1y ago
    The S&P500 represents 87% of the US market (~$54 of 63T). Inflows to S&P500 funds are evenly distributed among that 87% (by market cap). I think concerns about market concentration are usually expressed about, e.g., the Mag 7 being 31% of the US market (~$19 / 63T) moreso than the next biggest 493 stocks. S&P 500 inflows don't overweight the Mag 7 relative to any other S&P 500 component.

boppo1 1y ago

Yeah maybe if we hadn't quantitative-eased away earnings pain for companies for 15ish years.

what-the-grump 1y ago

Please point to the active money in this economy? The pension reallocations? Blackrock? Bitcoin? There is a ton of money being siphoned off with zero place to put it. When sv collapsed why does Roku park half a billion dollars in a bank account. Roku has 8th of Mazda’s net worth parked in a bank account… there is unchecked capitalization for the sake of the share price, this money is doing nothing except buying up competition.

ttul 1y ago
The Roku example perfectly illustrates the deeper issue here - we're seeing a systemic breakdown in capital allocation that goes beyond the passive/active debate. The real problem is a feedback loop: large companies get cheaper capital → they can afford to hoard cash and make defensive acquisitions → this reduces competition and innovation → which paradoxically makes them even "safer" investments → reinforcing their cost-of-capital advantage. Meanwhile, the "missing middle" gets squeezed from both ends. Small companies can access some capital through VC/growth equity, but medium enterprises ($10M-$1B revenue) face a brutal gap. They're too big for most VCs, too small for institutional debt markets, and banks are increasingly consolidated and risk-averse. (I am so personally familiar with the missing middle in my day job) This isn't just about market efficiency - it's about market structure. When a streaming company parks $500M in bank accounts instead of investing in content or technology, that's not rational capital allocation. It's defensive positioning enabled by cheap capital and regulatory capture. There are many many lazy companies sitting on a cash machine structure with no decent ideas on how to grow. Some potential fixes: - Tax policy that penalizes excessive cash hoarding; eliminating the tax deduction on interest would encourage companies to hold less cash by making cash more expansive - Regulatory limits on horizontal acquisitions above certain market share thresholds - Public development banks focused on the missing middle (like Germany's KfW) - Capital gains tax advantages for investments held in companies under certain size thresholds The irony is that this concentration might ultimately hurt passive investors too - less competition means less innovation and slower long-term growth across the entire economy.
- com2kid 1y ago
  Counterpoint - Nearly every startup I've talked to recently (last year or so) has been cash flow positive after just series A (or sometimes after just a seed round!) Companies are pursuing smart business strategies and prioritizing healthy rates of growth over "hire everyone we can and figure out how to make a profit later". I'm seeing a lot of very focused businesses that are meeting customers demand right away and solving real problems. They aren't billion dollar problems, but they are profitable problems to solve. I wonder how the startup ecosystem will change if VCs start seeing 60% of companies making a healthy profit after a couple years, vs the historical trend of waiting a decade and hoping 1 company strikes it big. 60% of companies growing 10-20x ROI seems ... Not bad? One problem of large mega corps is they don't even bother to go after new ideas that aren't multi-billion dollars markets. It used to be Microsoft would make a bunch of senior engineers filthy rich, they'd go boot strap a new company, and if the idea took off, Microsoft would aquire them again. Some people in the 90s/early 2000s pulled that off multiple times!