The Index Fund/ETF Bubble - How Bad Is It Really?

You've probably seen the circulating claim that we're in an index fund bubble; this is of course possible, but let's clear up the facts around the argument before jumping to conclusions!

DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.

[ThePlainBagel]

Happy Friday! What are your thoughts here? Are we in a bubble or are these claims nothing more than fear mongering? Let me know!

[toilet_cleaner_man]

Micheal Burry, the man who has successfully predicted 55 of the last 2 financial crashes.

[tipsy]

The market crash will occur after I begin investing for the first time

[BenFelixCSI]

This was an excellent nuanced discussion of a poorly understood topic. Well done, Richard!

[haruruben]

Everyone tells us to diversify, there’s nothing more diversified than investing across the index

[PhantomSavage]

When you invest in a total stock market index you're essentially betting on the US economy to continue to grow.

Thing is, the US economy has never not recovered from a crash, even apocalyptic crashes and crisis like the housing bubble or the great depression. You're essentially betting on the nation to continue to fare well, which it has consistently done so since its several hundred year inception.

But if the US economy completely disintegrates (civil war, nuclear anhilation, ect) then investment strategy doesn't really matter at all, does it? If the index fund investors are screwed, then EVDRYONE is screwed.

... except those that heavily invested in international markets.

[SeanLei]

In my mind, if a total US index fund tanks that means the entire us stock market tanked. No point in owning individual stocks. Imma just buy more of the index fund at a discount

[mikea]

On 11/15/2019 when this video was posted, the S&P 500 was at ~3, 000. It is currently at ~3, 900 (12/12/2022), down from the peak of ~4, 700 at the end of 2021. Interesting to see where the markets went since this video was made

[EvangelistRBColbert]

Active fund managers will never like passive investing, because it doesn't line their pockets. I will still listen to Jack Bogle's and Warren Buffett's advice any day of the week.

[steveantonioni]

Thanks for making this video Richard! I think it's very important to make sure that headline topics like these receive a nuanced take and that we make sure to take into account all available information.


For example, it's been seen that in the long term no effect is had on stock prices that are added to an index.

[stephenmarkley]

I'll be writing a research paper on this, or more about how ETFs are taking away clients from bad investment managers.

[benjamincartledge]

The funds themselves can't be in a bubble. Only the underlying investments can be in a bubble. If the stock market is in a bubble, then we aren't going to be any better off holding actives rather than passives. In reality, after charges, we'd be even worse off. Passive investing is becoming more active now anyway - we can now track styles - value, momentum, quality, size....there is an algorithm for everything! It doesn't make any difference if an algorithm makes the buy/sell decision, or a manager does. Fund managers are just butt hurt that they can't just give us market returns or worse and charge 1% anymore. They now have to sing for their supper by outperforming. Most of them can't do it!

[BryanHo]

As always, great discussion on a complex topic. I’m not worried about a yet. I’m more concerned about the growing concentration of voting shares among a small group of institutional investors and the potential implications of this.

[Jack-fdcx]

YES!!! Thank you! Finally, someone points out that REGULATION also played a very big role in fueling the fire of lending to high risk credit borrowers. The movies and media seem to gloss over those failed regulations and many, many other failed regulations.

[horsepowers]

If it crashes, I will buy a lot. If it does not, I will buy just a little.

[freddieflintstone]

The problem is active fund managers and their high fees. Most active fund’s performance is less than the similar index fund. I worked at on company and all the fees added up 7% my 401k never had a gain. I got the boss to drop that company.

[fzigunov]

Too many fortune tellers in the financial market... One of them is very likely to be right, but a priori can you tell who?

[alexandersalazar]

The only way how index funds can be in a bubble is if the underlying assets are in a bubble. The fund tracks the underlying assets not the other way around.

[OlavD]

If the stock market crashes the active investment funds will fall and then get the additional management fees on top of that, I`ll stick to index funds. No reason to pay finance guys to play a zero-sum game with my money.

[bradley]

Of course a hedge fund manager would call them a bubble. Hedge fund managers can't out perform the rates of ETFs