Wait, I'm confused. Actual analysis and explanation. Where's the fear? Where's the drama?

<a href="#" class="seekto" data-time="221">3:41</a> - This was a real lightbulb moment for me. AUM doesn't drive pricing, trading does. How did I not see that before? It's such an obvious refutation of the Burry Bubble clickbait. Thank you for shedding light on the F, U and D surrounding this whole thing.

As a finance PhD student, I don't think I can explain this issue as well as you do. I also think your explanation is better than quite a few finance professors who work in the mutual fund literature.

I've previously mentioned in the comments about a potential index bubble. Thank you for making a video on this, so plebs like me can be educated 😅

waiting for Michael J. Burry's response :D

One of the most informative channels out there!

Your titles are perfect for attracting the viewers that actually need to see the video

Great video as always! The bubble claim was obviously dubious (per definition, it would have been the underlying stocks that were bubbled - comparing index funds to subprimes was ludicrous), but that index funds could introduce a (temporary) distortion sounded more credible. You brought an important perspective by analyzing the trades and not only the assets under management.

Hey Ben, thanks for helping out! Came here from Fabio Holder's KZfaq account. Keep it up!

Haven't clicked a video this fast in awhile. Spot on with this analysis Ben!

Great video as always Ben. Wanted to thank you for all the insights you've provided. Your evidence based reasoning filled the knowledge gap I had, in an accessible way, and led me to reconstruct my small private portfolio into something I can actually explain and confidently reason about. Cheers mate.

Incredibly informative and backed by research!

Canal do Holder brought me here. Great video man! Subscribed already.

Don't usually comment on KZfaq but your videos are informative, interesting and has converted me from an active portfolio investing methodology to swinging to an ETF heavy portfolio. Your videos are insightful and great learning. Keep up the good work!

The risk is, that you don't own the underlying asset. The risk is there is no price discovery and the risk sits with the owners of the funds.

Good explanation! What do you think of the critique that index fund growth leads to more common ownership which in turn is bad for consumers? Any papers you would recommend on that topic?

Excellent analysis as usual. Most index investors are probably long term holders and will gladly buy weakness, not rush for the exit. No comparison with CDO toxic assets of 2007. Thanks for this great video Ben.

Great Vídeo Ben! Thank you! What do you think about Brazilian index funds? Are they good enough in number and structure in order to build a diversified portfolio for the long term?

Wow, such an awesome quality content. KZfaq is really getting good. Thanks Ben!

Thank you for clearing that up. Reading all these articles on the index bubble lately made me worry a bit but not anymore! Too bad TD doesn't offer any small cap fund in their e-Series -.-

Thanks for the video Ben!! Question- when people say a small cap value tilt, what % range would that generally be of a 100% stock portfolio?

It's nice to see this channel growing.

Awesome video! Quick question Ben, I use vanguard index funds for my portfolio but I have a problem with exposure to small cap value stocks that you mentioned towards the end of the video. The small cap value index fund that vanguard has includes blend as well as growth stocks, and mid cap stocks. In this case, would I be better off just investing in the total small cap index fund? Thanks again for a great video!

Reminds me of the 2008 housing crash where all the 'experts' were swearing that the market was fine and normal..."buy now or be priced our forever" ...we shall see, but the very few will be making a killing again!

<a href="#" class="seekto" data-time="350">5:50</a> - Speaking of active manager, I think on was trying to say something before the jump cut.

Was just listening to the episode with Pastor, and this Glassman-Stiglitz paradox is absolutely fascinating.

I didn't think of the shorting cost benefit from index funds so thanks. I have noticed some active investing out performs the market not due to skill but sheer concentrated volume in a small number of shares (eg consistent gains from a popular newsletter leads (motley fool) to more being invested instead of analysis based on business fundamentals). Seems less of a issue in index due to large/deep secondary market at this stage. Cheers for putting into a video.

@<a href="#" class="seekto" data-time="582">9:42</a> "If the market is broken..." Yes, but if passive investing has unfairly boosted the price of mega-caps then that trend may have a lot further to run. Anyone tilting to small caps is effectively short a long-term structural trend. Small caps may indeed be cheaper than they would be if passive hadn't been invented, but they can get a lot cheaper if the the migration to passive persists...

I see that the most important arguement in this video is that Trade volume is responsible for price discovery (not AUM) which is true. You also make the important claim that indexing makes up a relatively small amount of trading volume. All your arguments are spot on. The only interesting im left thinking about though is that how some large cap "popular" stocks (e.g. Amazon, Google, etc) could have their prices distorted not only from the ~5% of trading done by passive index funds, but also the mountains of actively managed mutual funds sold by financial advisors all over North America. I would bet that would make up quite a bit more trading and therefore have quite the effect on pricing (maybe distortions) because certain stocks are owned by such a crazy large amount of mutual funds.

Insta subscribed I'm always on the lookout for good financial content and this was some A grade material, kudos for the studies and citations.

Thank you Ben for these videos. Will you be able to explain TVIX?

Class in session early on a Saturday.

Ben, do you leverage your investments using margin?

From some years the flow of etfs has been similar to that of quantitative easing from a central bank on bonds. This means that many buy indexes as sp500s because they know that further flows will come from etfs (and buybacks) and not for fundamental reasons. In this case there is no difference between active and passive investors: both end up pushing a certain category of shares (those that are in the sp500). In the video you talk about the pricing BETWEEN the shares inside the index. The problem is, instead, in my opinion, that ALL the shares that are inside a "popular" index become too expensive because of the etf and buyback flows. This dynamic is then amplified by the active managers (and not the opposite): the final result is that you have expensive shares (and you buy it using etf) and the risk of a big bubble

Excellent explanation. Within any " index fund " the individual stocks are being traded independently as well as being held in " other " indexes which could be going down at the same time as another index going up with the exact same holding in both. It's the stock that matters , not the index.

Whats up Ben, Fabio here and I just found yout channel! Great Job! Already subscribed. I am a financial analyst here in Brazil and I also have a channel here about stock market and financial analysis.

What do you think about the emergency exit being too small where people trying to sell their index fund in a recession will be too crowded for people to be able to sell?

Ok, not just subcribed and bell, now adding you to favorite videos of all time. ;)

Hey Ben, only just recently found your KZfaq Channel and I wish to thank you VERY much for the excellent content you publish. I previously thought I was reasonably smart until I learned from people like Jack Bogle, and Eugene Fama, Daniel Kahneman & Amos Tversky via Richard Thaler, and more widely Nicholas Taleb and the late great Richard Feynman. I very much like your approach of directly referencing the key research papers as that significantly helps people to do their own research to change their own minds (as only they can)! Many, many thanks, cheers Stewart

I keep coming back to this video. Such good information and reminder

thankyou so much for this video!!!! explained so clearly and now it removed the little concern I had when I read about the bubble claim. May I ask what a portfolio manager like yourself does just out of curiosity in your day job? :)

Hi Ben, could make a video about rebalancing frequency in an asset allocation strategy?

Ben, love your videos. Hope you will answer this question: in general I interpret that you believe index funds should be a very dominant if not exclusive part of ones stock portfolio. Giving that index funds tend to give average annual returns of 6-10%, before inflation, is this spectrum of return what you believe that one should be content with for its stock Market investment or is there someway to reach a higher return? Thx in advance

I'm enjoying your channel's content more and more. This one was truly informative for someone like me who has arrived in Canada just recently. Thank you indeed.

How would I go about overweighting small-cap value stocks?

Thanks Ben. What is a good fee for a ordinary and for a factor tilted ETF? From what point is the fee too high? Is there a place for derivatives in the buy and hold investments of a rational investor?

Content is always *superb* ! All I can say is keep it coming =)

O came from Canal do Holder Channel!

Thanks for the video. Read an article about this and was wondering what's your opinion. Found you already made a video about that. Btw, I'm wondering what you think of "recession probability model"(JEREMY PIGER)?

Once again your video gets a 10/10! Thank you!

Awesome video! I think index funds are so helpful when it comes to diversifying. Keep up the great content. I look forward to your future videos.

Always excellent information...thanks Ben!

Glad you cleared that out!

I agree on overweighting small cap value. 40% of my Roth IRA is in slyv

Great video! I have been wondering about this for a while but you made everything very clear

Awesome video! Your explanations are always so understandable and helpful. Watching some of your older videos, you now appear younger, slimmer, fitter and with more energy. What have you been doing? Keto, vegan, triathlon or crossfit? - Retired Boglehead whose still learning.

Enjoyed the video Ben... Thanks! I think your analysis was spot on in this case. If Index Investing does cause the crash of all crashes as some predict, it won't be because of the index investing per say. It will be due to some crazy event causing a mass exodus from all investments. Outflows will be largest for indexes simply because that's where the most money lives. I find it funny how so many are hoping for another stock market crash of 50% or more. These folks think they'll be buying at the absolute bottom, which won't be the case for most. Many will buy the wrong stocks at 50% down seeing value only to sell in panic as it drops another 25%. Additionally, stock market crashes don't happen in bubbles. They happen due to major events, which may very well limit the ability to invest at all when stock prices are the lowest for many. Just saying be careful what you wish for folks... BTW... Really like small cap value right now, growth as well but to a lesser degree today.

Funny...I did post the question to Graham about his thoughts on Dr Burry's Index funds bubble claims... Felix, you are one step ahead. Subscribed..

Great video! Would small cap index funds also be affected by a bubble burst or just the large cap ones..?

Hi Ben, I have a question regarding index funds. As a Canadian is it better to hold the US market through a Canadian cash account using for example XUU or XUH, or would it be better to hold ITOT in a US cash account?

I'm in need for some information, it appears that with something like MSCI World index etf or European STOXX 600 etf there is very little to none exposure to small cap stocks right?

Hello from California; Do you mind explaining the structure of Synthetic ETFs?....Thank you in advance!

You should do a video on the effects of index fund dominance on competition between firms.

Great video. Interesting to know that index funds represent only 5% of the market transactions.

Nice. I didn’t even know this is a thing investors are worried about. Thank you for expanding my knowledge. I will sleep on both ears tonight.

Hi, I need your thoughts on this. Is it better to buy index etf or the stock of the index fund company itself i.e. BLK vs ITOT. The line between diversification and concentration become less clear if we recognize that when even we buy and hold a broad market index fund, we are still making a concentrated bet that the fund company can stay in business and provide their products. On the other hand, one can say that a stock of a fund company such as BLK is a diversified investment because the underlying business is in broad market indices. Let me know your opinion.

Brilliant, well crafted good sir!

I appreciate your point of view however I think the point of these fears is not what is happening now but what happens in a crisis. Pointing to the limiting amount these funds effect a liquid market is like rating a movie based on its trailer. We have not seen what happens yet in a truly illiquid market with this level of funds under management. Remember that mutual funds have far more discretion in a liquidity crisis than an index fund. The fear from more astute analysts is more about how this will effect a sell off not and price increae. Very solid points on why they have limited effect on price increases thougg

Sincerely, with the actions of central banks in all the world and all the time printing money as crazy , you come to me complaining that index funds can create noise in price discovery? Get out of here...

Hello everyone, About a good companie to buy stocks and REITs: wich one is better? Charles Schwab, DriveWealth or TD Ameritrade?

What do we do if the distortion only goes up and active investor can't profit from any drop? we only going up then?

I came from canal do Holder Channel!

What are some good performing Nanocap stock's?

Assuming an efficient market, what would my investment portfolio look like if I had an infinitely high risk tolerance? In other words, what investment yield the highest expected return without a regard to risk. To my understanding, I would just choose the security with the highest risk premium, which would just be randomly selecting a stock or crypto currency

Great video, you present this in a very clear manner!

I see nothing inherently wrong with index funds (the products). The issue I see is the size of the exit door, as Burry states: ----------------------------------- Liquidity Risk “The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic. “In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.” ----------------------------------- As can be seen in the flash crash of Dec 2018 (the market dropped 18% in less than 3 weeks because the fed raised interest rates a quarter-point). The exit door gets really really small when everyone is trying to run through it. In a normal market, purchases and redemptions are mostly balanced and index funds don't do a lot of trading. The problem with retail investors is they always run for the exits at the wrong times and try to go to cash when they shouldn't. What happens when you get a real crisis, not just a quarter point interest rate hike? Most people forget the markets simply don't just go straight up, year after year after year. FTR, I don't know what happens and fears could be overblown but the exit door size scares me. If selling takes place for months rather than weeks and retail investors get really scared and decide to move to cash all at once, I'm not sure who would step in to buy... I guess the gov't would have to, similar to Japan where they own a lot of the stock market assets.

How do you create the animations?

I have Mr money mustache and now you to thank for better understanding this debate.

Love your content! Thanks for your efforts.

I can tell you one market where ETFs are distorting visibly: The Canadian Preferred shares market. This is visible where when interest rates go down, preferred shares not directly hurt by interest rates go down with the rest. This indicates mass buys and sells rather than individual examination...

Damn, people are up early today

Great arguments thank you!

Still not clear how the price is matching the index

I wonder if there’ll be an update to this video now after that interview with mr. Green

I have heard that mid cap value has historically outperformed both small and large cap stocks. Have you done any research on midcap stocks?

"The market is like a large movie theater with a small door." Nassim Nicholas Taleb

Large cap ETF are solid but the trading argument is iffy at best for ETF with high levels of subscriptions but with illiquids components. The poster child for this is junk bond ETF. I used to work for an AP and even in the best of times some underlying issues were hard to trade while the etf could trade all day on heavy volume without a glitch... this can be managed well during period of low vol but if people start selling in mass it could get really sketchy really fast. Right now all those junk bonds linked to etfs are warehoused but if redemptions rise fast the market will not be able to absorb all the selling.. it used to be that bank's MM provided liquidity for high yield bonds but not so much now, it takes too much space on their balance sheets. To me, the tail risk for these kind of products is real.

Hello Ben felix. At <a href="#" class="seekto" data-time="513">8:33</a> you said "Index fund hold large amount of securities that they lend to short sellers, key revenue for them and reason for low fees of etf". That is the main risk for me, what happens if short sellers can't pay back, in a crisis for example? It seems like having an ETF is having a share of a fund of stocks where those stocks are lent. Whereas if i buy a stock, i am the only one to have it. So in the end it seems like choosing between ETF and stocks is basically choosing between Low vol/Risk of loose everything(ETF) and High vol/at least have something(STOCK). Can you tell me what you think of that ?

One of the things I appreciate about your videos is first I’m pretty sure you’re going to tell me something I don’t want to hear however it will be level headed and well researched plus you are dispelling new myths. The new myth that index investing negates or distorts price discovery. Are index funds going to collapse between what Michael Burry says and ARK Invest, what’s what? What’s truth from hyperbole?

I learned more about investing from this channel than any book or course.

Best video on this subject. Thank you Ben. You gave me an idea: read "Stay the course" by Jack Bogle.

Brilliant. Excellent breakdown and explanation. Although... Would be interested in an update post-pandemic...

Where is the actual interview?

your videos are always educational

You’re my hero! Thanks for cutting through the noise

Another reason to split your passive index between US S&P 500 & UK FTSE 100. If there's a bubble in index ETFs its more advanced in the US markets and the London market indexes give you equal risk /return comfort with an extra door to exit the crowded theatre if needed.

I have a brokerage account at Fidelity. I like it because there's no cost when buying their index funds, which also have very low fees. They recently put up a small cap value index fund, I've been thinking about buying into that.

If youtubers were stocks then i would go long on you

Great video. I think the Stiglitz paper should lay waste to the worries about index funds ruining the market.

Can you add to your explanation of how secondary markets operate. I had to watch the segment at <a href="#" class="seekto" data-time="240">4:00</a> about 10x and I am still a bit confused. Your explanation of trading volume for ETFs on the primary market/underlying stocks makes sense, but I don't understand why the secondary markets alleviate all the concerns. Is there no risk to these unit holders trading amongst themselves? Perhaps not as it relates to price discovery but what about liquidity? Also, how can so much money be tied to an index but not own the underlyings? Then they must be leveraged or using instruments to tie the two together. Is there risk there? I don't know enough about the internals of the market to understand what is a simple mechanism/service versus a product with inherent risk. E.g. homeowner knows what a mortgage is, but banks created a product with risk (CDO) with the mortgage. Are these "units" the ETFs trade in anyway analogous to CDOs?