So am I doing wrong if I want to put my money on a 3x leveraged ETF like TQQQ if this ETF is meant to follow the market and it's relatively stable compare to an oil ETF or commodities? I'm starting investing, so with this TQQQ I find diversification with a stable levegeraged gains... Please correct me If I'm wrong.
The Plain Bagel, hey buddy great video very controversial! I’m putting out a video a little later and I think there is validity in the ETF bubble since ETFs are sector based. Yes most are asset based but many are synthetic yes 100% derivative based and on top of that some of those are leveraged. This is what my video will be about these are defiantly in a bubble.
Fernando Orozco that’s a 3x leverages 100% derivative based so it’s insanely risky just FYI you make your own decision. My video is on that exact index.
Tom Isaacs ....in my opinion the questions you have to ask yourself are 1) "what is the empirical evidence on active vs passive investing?".....the answer is, on average, that after fees and expenses, active management tends to produce worse results!.....Now, that is on AVERAGE, so there are some good stock pickers who can, after fees and expenses, "beat the market", but they are few and far between and even fewer can do this consistently. (i.e. Investing is a long-term activity, so being lucky/good over one period, may not happen over thirty to forty periods ). The second question is: "do you have a competitive advantage (or do you have access to someone who does)?....if the answer is yes, then active investing may be for you. If the answer is is no, then stick with passive investing. The problem here, is how to determine "competitive advantage"?....past history may or may not be a good indicator....will strategies that worked in one investment regime work in another?....How does their strategy change to,reflect different regimes?,,etc.
If enough people belive it is a bubble it will burst as one. If people are happy with passive investing on ETF and its derivatives and discard the idea of a bubble we will eventually be in one. To avoid a bubble we need balanced thinking on both sides :p but heck I am neither investor neither PhD. Thanks for you video it is really easy to watch and I feel I learned something
If your young enough to be investing for the first time and your not desperate for the money you can just ride out the crash. Index Funds will eventually recover their value unless the US economy completely and permanently falls apart
The market did crash after I invested for the first time and I just held on and averaged down and eventually exited from a few bad choices a year later with a fair profit.
Currently down a couple hundred on an equity trade. Bought in at a new low of $15 and I thought I hit it smooth but it keeps going down. It concerned me but then I remembered that I'm an 18 year old college student with no dependents and about 85% disposable income so. Even if it does crash when you begin, just buy more lol see it as an opportunity.
Ben would not give "grief", Ben will just hand over the Peer reviewed papers and throw words like "CAPM" or "%-factor" at him until the problem goes away xD
If you're diversifying for risk management, you should also look into stocks with a negative beta (move opposite to market), or hedge with shorts (I don't advise shorting) or puts. As someone here mentioned, gold and bonds are also great diversification tools (in a bull market they are often overlooked for their low return). But just keeping a healthy percentage of cash is also risk management.
The ultimate diversity is weight averaged total market index. But that's too diversified in that it assumes no one stock will do better than any other, which doesn't really make a whole lot of sense anyways. So just using any normal index fund should be fine, or just everyone's favorite, an SP500 fund.
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.
I'm Chinese living in Australia, so Im heavily invested in three markets including the US. However I dont think my portfolio will survive a US disintegration lol The Aus market follows US to the beat, and the Chinese market gets moved by foreign investors(US) regularly.
Japans index is not likvid and open for foreign retail investors. That is it is mostly just profesjonals investing there and lokals who where broke in the 90s. The us economy is ALOT larger and is globaly ownd. That is the whole planet buys dollars, apple stock and s&p500 etfs and indexfunds
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
J White Are you proposing to invest in individual stocks to avoid a .04% expense ratio? You could beat an index fund but the chances of beating a diversified, broad index are *very slim*. This is why so many stock pickers perform so poorly. Also I wouldn’t go so far as to say stocks are extremely illiquid. Equity tied to houses are extremely illiquid, but for stocks you just sell them and wait a few days to transfer to your bank account. In the event of a recession and the economy tanks, there may be more (panic) sellers than buyers, but as warren buffet says the smart investors will simply continue to hold their assets and buy more.
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
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.
65% are « market timers». Of the people buying etfs and indexfunds. Thats the main reason they lose over time. People panic and are addicted to short term gratification and the obsession of wanting to predict the markets and politics in the short term. The mix of anxiety, envy, greed, panic is the main movers in the markets.
Is that an original thesis? Not really. That debate has been going on in the discipline for years. However, you should consider that although index funds and ETF's are empowering the Ordinary Joe to passively invest, he might just be jumping from the frying pan of poorly performing active fund managers into the fire of badly index designers. Remember, the Ordinary Joe barely understands how the underlying assets of IFs/ETFs are structured, or how sound the indexes are. But, they're easy right? Index Funds are considered to be safer than ETFs, and there's possibly a very good reason for this: probably a lot of those poorly performing Active Asset Fund Managers have been following indices in the main and limiting their exposure to more risky investments. i.e. They been hedging their bets, hence the underwhelming performance.
@@BigHenFor I dont think all those issues are relevant for "ordinary joe", after all it just tracks some top companies based on some criteria and there are so many ETFs that it kind of is an active purchase...statistical research has shown that active funds only sometimes beat related ETF (maybe 5% of them, dont remember exactly) and almost none of them are able to do it time and time again up to a point of it being almost impossible for ordinary joe to find such active fund (for example in my country in EU there are maybe 1000 active funds and NONE of those beat the market, the difference vs ETFs is like 3-4% PER YEAR - just do the math in 10 year scenario)....the key for Ordinary Joe is not to pick the best option but to avoid mistakes (just like in tennis for example, better players on average are those who do less mistakes not those who actively beat the opponent by great strikes)
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.
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!
What you're saying is true but it isn't any different than what people like Burry are saying. Passive ETFs are creating a bubble, not exclusive to passive ETFs but to the market as a whole. Anyway, it's not true anyways. There will always be price discovery. Look at daily, weekly, monthly movements in s&p 500 stocks individually. They don't move up and down together in unison.
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Will Roberts you clearly don’t understand how they work.
Fund managers have algorithms that you don't have. There are some robo investing tech with extremely low fees, but typically they just do weak tax harvesting techniques and also do nothing more than active rebalancing. Active investing through advisors use tactical investing strategies over strategic investing. And even then, robo investing people, invest emotionally still. Your advisor is supposed to keep your emotions in check and keep you on track, mentally and emotionally, and financially. Now, it's true that the underlying investments would have to fail first for the etf market to burst. Makes the most logical sense. And couldn't the same thing be said about mutual funds?? The underlying stocks may be more liquid and easier to sell, but I don't know why the underlying stocks would be more liquid to sell than the etf? You can explain that part to me.
Ooooo the ETFs can be in a bubble! Because etf trade on their own and the trading (buying and selling) is what make the price go up and down, so if ETFs are trading more than the underlying investment, then the value of the ETF can begin to pull away and be different than the underlying investment. So if the prices increase soooooo much more than the underlying invest, when the underlying invest fails, then the etf will tank exponentially more than the underlying invest, percentage wise. He mentions arbitrage, which can work only in bull markets.
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.
Regulation ALLOWED high risk lending, whereas high risk lending would happen in private market regardless. So you are also going too far to the opposite extreme. Need example? What do you think loan sharks are?
@@dailyrant4068 they lent to high risk people because the government guaranteed them pay outs if the people couldn't afford payment. these guys aren't dumb, they would only lend money to certain people if they knew they would be reimbursed by the state. not a good business model to lend money to people who can't afford to pay you back, right?
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.
As always, great discussion on a complex topic. I’m not worried about a bubble..... 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.
@@tomuxp1 My comment still stands. Leave it in. It will recover. Will it be a quick recovery? No. Will it happen? Yes. Should you take your money out right now? Absolutely not
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.
So long as the invested money isn't borrowed money, it won't explode disastrously. It may still go down or up, but every crash in history has been caused by major borrowing in the belief that people will make easy money. Passive investing doesn't really work that way. It's usually people taking the top part of their paycheck and then spreading it across the market. That means it can be directly affected by other market forces, other bubbles, but in of itself can only provide capital gains because it's already the investor's money. There's no credit or loan to be paid back that the investor would default on causing a devastating crash. It's not the collapse of the market that causes a recession or a depression, it's the inability to pay back the debt.
For anyone who doesn’t understand why people don’t like ETFs. 1. If everyone buys into any one thing at a high enough rate there will be a liquidity issue sooner or later 2. Passive investing means that you aren’t actually evaluating whether a company is worthy of your investment or not, you’re simply deciding that if your portfolio is diversified enough, you are ok with losing on some of those companies because another one will be added to the fund. 3. Prices increase for Individual stocks when added to an index even though said company may not deserve your investment. So you effectively have stocks in your portfolio just to say that your portfolio is diverse and not because you believe every individual stock in the portfolio is a good investment. 4. If everyone is invested into ANYTHING, do some research and you’ll see that that’s not necessarily the way to go (1987, DotComBubble, 2008) and holding the opposite side of the majority has always panned out for those who do the requisite research.
@@leocriss6354 I get what you're saying but I truly believe that lots of these so called stocks that end up being listed in the indexes are actually the result of active investors. Surely we can all agree that Tesla doesn't deserve the hype it has right? As a result sooner or later is bound to be in the S&P 500 and a result of that will be it will be added to the big indexes. They say time is money and I rather the rest of the people decide where they spend their time. I'll just choose the basket that they themselves chose to be in the position for me to put my money. Will I put my savings on the tech sector? Probably not yet I see people put 100's of thousands behind one specific stock. Nowadays to become a billion dollar enterprise all you have to say is that you smelled the insides of a new Tesla car. Doge to the moon and what not. The bubble is elsewhere imo. Nobody making a movie out of the indexers anytime soon, meanwhile Burry making a cameo in this GME fiasco.
All knowledge aside, not only is this video quite informative, the comments are surprisingly academic and constructive too. Still, thanks for the info! I just started investing last March, and I’d like to know the rundown of all things finance.
The main reason I’ve got into ETFs and Unit trusts really centres my circumstances. I’m 24 and just graduated from University. I have put some of my savings into investments but the majority (approx 3/4s) into a savings account so I can put down a deposit on a property sometime in the new year. So from my view, I’m A) just starting out and B) have very limited capital at risk. Therefore, I’m happy to accept short term losses as I’m planning to be in the game for decades yet. So to me, ETFs and UTs are a good way of exposing myself to varied and diversified investments without paying through the nose in commission. As I get pay checks each month and save more, I may look at switching more to the underline investments more. At the moment UTs are particularly valuable to me as they only have a single daily valuation point. So it’s easy to keep track of how things are going. Would appreciate any thoughts people have on this approach.
Warren Buffett recommends index funds since many years, he knew if you hype up something it will become a bubble, he indirectly made it a bubble Michael burry is actually a good guy here
What puzzles me is that people are STILL listening to these "financial gurus" as if they can read the future, meanwhile they engineer the future with their own narratives, for their own personal gain, and at the expenses of the majority of their listeners. Give me your ice and I will give you water, basically.
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.
Agreed , with all the data and knowledge accumulated I still believe that it is extremely hard to predict a bubble . There are so many factors that come into play and so much complexity.
Et al is just latin for "and others" many financial papers since they have multiple authors, will use et al instead of listing the names of everyone who contributed.
"Regulation also played a key role in encouraging banks to lend to lower credit borrowers"... needs to be discussed more, but it can get political at that point. So people, just do your research ;)
Thank you for the video! Very informative! Certain indicators do point out the bubble formation, in my opinion. All market cap weighted index funds blindly track equities based on their benchmark indices, irrespective of the dependability of the underlying stocks. A few examples/facts that are frustrating about index funds are as follows: iShares Russell 2000 Value ETF (IWN) and iShares Russell 2000 ETF (IWM) are now both tracking AMC as it's Rank 1 holding, only because this meme stock gained a higher rank based on market cap, only in the last few months. Both the above ETFs also used to track GameStop (GME) in their top 10 holdings for many months this year, but now, the attention seems to have shifted to AMC. Index funds do not care for volatility / turnover within the index caused by market cap changes. Also remember that indices are fully actively managed, in that, someone makes a decision to add or kick out a stock, so there is risk involved. The fund itself is termed as low cost, obviously because the allocation is all automated, but the risk is there because you are 100% relying on the decision made in the index. All Large Cap Growth ETFs, you name it, Vanguard, Blackrock etc, have all been tracking Tesla which is in the top 5 rank since last year, because it got promoted to S&P500. Tesla is still a questionable stock for it's reliability based on the high speculation and overvaluation! Tesla has huge volatility and uncertainty, and to put a large chunk of your retirement savings in Tesla via an index ETF is not very comforting! The decision to promote Tesla to S&P500 top 10 was very brash in my opinion. For anyone invested in index funds, they are inevitably forced to invest their money indirectly in meme stocks or stocks that are overvalued because a market cap weighted index tracks it!
Risk Levels from least to highest: 1. Savings practically no risk - Very low profit, 2. Bonds minute risk - minute profit, 3. ETF, Index funds - slightly risky - passive profit, 4, Dividends - Risky - greater profit/value, 5. Growth stocks - Very risky - Fantasic profit and 6. Collapased/Bankrupt companies - Incredibly High risk - Incredible growth. Lets highlight as you go up the scale from 1 upwards your profit gets bigger and bigger however, with that the fall is much bigger too. Overall its where your boundaries lie.
As a Canadian, I would never short our banks. They have really influenced the general public that they have their best interest in mind with investing. They do not but people think they do.
End of the day, the value of the company we buy has not much to do with the price we pay. Quote: Price is what you pay, value is what you get. --Warren Buffett
The influx into these funds is driven in part by low interest rates on term deposits. Those who aren't active investors are looking for a return on their savings
This kinda goes along the lines of inflation. Because a lot of people recognize a store of value that store of value is overvalued than it should over decades
it's actually not because of bat soup, technically if you cook it you can eat any animals provided they really are safe to eat and had no poison like pufferfish. purpose of cooking is to kill virus or other harmful bacteria though this include good bacteria too. one of main reason is the market hold live animals and that what the cause of it
@@davidmella1174 there multiple hypothesis 2 that I believe likely is 1. lab where they actually did test a new virus to cure it but the handling is bad which something usual in china either the animal escape or sold again to make some extra buck for people working in the lab resulting in the spread. 2. it just new diseases happen to be mutated from animal to human since the market is full variety of animals that are mostly not treated.
Always appreciate your thoughtful analysis and explanation! I'm a pretty big passive investor too. Although there isn't a large amount of trade volumes, what do you think would happen if there's a large sell off and ETF holders decide to sell? I think that scenario could lead to a more precipitous fall on the underlying securities.
Love your work because of your excellent ability to breakdown complicated topics! btw, I found you during my CFA Level 1 studies and it helped me understand some of the more challenging topics within the Equity and Fixed Income sections; happy to report that I passed Level 1 and moving on to Level 2 this upcoming June! I appreciate your work!
Re: Arbitrage: that's.. how ETFs are designed? That process is the whole point! The AP doesn't create/redeem shares; it just collects the underlying shares, delivers them to the fund company in exchange for new ETF shares ( Like for a mutual fund.. the difference is with ETFs only one participant is authorized, what is called, surprisingly, Authorized Participant. ), and then sells those shares. The trades the AP is doing are the exact same as the ones you described. That's how the AP is paid for their role in the ETF. The effect is normal: If you are buying a "basket of stocks" , that should have the exact same effect on the stocks' price, regardless of that basked being a mutual fund, an ETF, or simply just the actual set of stocks.
Awesome video. Great job staying away from fear mongering, everyone tries to make a name for themselves trying to call the next “bubble” when in reality if anyone had any real evidence and publicized a bubble, that itself would deflate the bubble before it pops. They’ve been calling for the next crash since I started investing in 2012, and if you listened to those trying to sell you fear you would’ve missed out on 7 years of solid bull market. It’s always time in the market, not timing or trying to call a bubble.
its funny how we think just because a person has been right once they must be right every time. same as when a stock is @ an ATH people assume it will continue to rise.
1. Index funds are not just for beginners, that's a classic trap to fall into. 2. America is 10x the size of Canada so it probably doesn't matter much on the world stage that Canadians buy more active funds. In Canada, for years, we've had much higher management fees/MERs, often around 2.5% but sometimes 2.8%. Smaller funds, lower economies of scale, less investor sophistication, a network of advisors that have an interest in keeping MERs high as well to fund their offices, computer networks, promotional jackets and mousepads and advisor trips to Spain and so on. When our dollar was at or above par with the US dollar some years back, Lexus Canada was asked why a certain vehicle here was $80,000 when a Canadian could drive across the border and buy the same vehicle for $50,000. They said Canadians tell them that they want to pay more, for status, for prestige. That was the end of the discussion. So Canada is a funny market in ways. 3. Typo at 11:28 on the word derivatives, you may want to fix that. I've been investing since 1998 when I was 20 and I still don't understand what Burry is saying here. I mean, I get the terms and the conversation about it, but I still don't get it. I loved the Big Short, I got that, but an index fund bubble, I can't comprehend it. Even after your video, I am no closer to understanding his point. For point number 1: ca.finance.yahoo.com/news/warren-buffett-thinks-apos-elite-193700282.html
I really like your channel. I learn so much from it. Not only the content is great, but the way it is presented is very compelling and the videos are so well put together. Thank you so much. Keep the good work.
I don’t understand, if the creation of more units of the index funds means that they have to go out and buy more of those companies then is the existence of index funds artificially pushing those prices up? And every time somebody buys into an index fund, for example once a month on payday, then doesn’t the index fund go out and purchase more shares? So the buying of index funds once a month forcibly means the purchasing of those underlying securities. Unless nobody is actually buying and holding and they’re all just selling their index funds to all the time which would completely defeat the purpose of the whole buy and hold strategy
Your example on ETF share arbitrage appears to communicate a wrong message. We start with the inflated ETF share price of $15 and the underlyings valued at $10. When the AP creates more ETF shares and sells them to the public he will have to buy the shares indirectly in the open market, thus the underlying will also rise lets say to $12.5 while the ETF price will drop to ~$12.5. But the same goes for the ETF share arbitrage: the guy selling the ETF share while buying the underlying shares in the open market will do exactly the same, i.e. lower the ETF share price to ~$12.50 and raise the underlying shares to ~12.50 In the end, I don't see any valid reason why the AP share creation/redemption should be less harmful than someone else doing some arbitrage.
Read a FT article that took the opposite away, managed funds were in a bubble which has started to burst due to index funds and over charging consumers.
A very good topic to get into. I like investing in both index funds and individual stock (mostly value for both). They both produce, and they both make money. Value index funds currently are underperforming compared to total index funds, but that's okay as long as I know it's safer during bear markets or recessions. And I know my stocks I pick as value are safer than others. Bubbles are a scary topic, but if we keep investing in value, the bubbles that are created are nearly nonexistent, and if they do happen it's minimal.
Really interesting topic for many European ETF investors like myself. Unfortunately, my broker doesn't have any non-synthetic ETF offer mimicking NASDAQ 100 and I understand many European brokers have this problem due to EU regulations. So let's hope we won't see a crash in synthetic ETFs like we saw with CDOs. Fingers crossed! 😆
I understand the argument, but it is self correcting. If prices of stocks in the index fund get out of line with their fundamental value active investors will buy or sell the stock bringing it back in line with its fundamental value.
What comes to Eisman, there's this famous quote from Keynes: “Markets can stay irrational longer than you can stay solvent." To me that really materializes the problem with timing bubbles. It's not enough to know something is a bubble (even if that is very hard by itself), but you'd also need to somehow know when the correction will happen. This also almost bankrupted Burry as he was burning money every day leading to the crash. Not sure for how much longer he could have held his swap positions. And as we see in the movie, everyone was not happy waiting... To me it seems shorting even something that's a "well-known bubble", especially with lever, seems like a financial suicide as you're almost certain to get knocked out as the underlying increases in value before the correction happens. If it ever happens. You might be right, but can you stay solvent until the market agrees with you? Being right is a sad win if you're already bankrupt 😅 To me one of these was Tesla stock. I was certain for months that it's overpriced on the market, but having no clue when it would correct itself, could not really position myself to benefit out of it in any way. Well, at least I didn't go long on it on the top like so many others 🙏
There are a number of things contributing to the US being in a bubble. One thing in particular is that the fed keeps printing money and doing these repo operations which it dubs "permanent open market operations." The reason they keep doing this is precisely because of a lack of liquidity in the market. A quick look at the history of federal expenses in the past 3-5 years will show that of the revenue the government collects, the amount spent on interest payments is has increased dramatically from somewhere around $237B to around $332B (I don't remember the exact figures). If interest rates go up, then the government will have to default on its debt, which would crash the global economy. They can't cut spending for some reason, and they don't raise taxes because that's unpopular. Once interest rates go to zero, they will be able to do nothing EXCEPT print money, and they will try to print their way out of debt, which will devalue the dollar. These POMO have driven the S&P 500 higher, and note that this is not the result of stronger manufacturing, increased sales or earnings of companies, or higher consumer demand.
I've always loved ETFs, but am 100% in equities now. I've seen a variety of smart people who disagree with him (and some who agree, lol). I'll just keep investing in quality companies.
@@fadhilhabibie6392 FCF yield is a good way to evaluate value companies, but this isn't the only way to value companies. Especially not growth companies like Tesla. You have to look at revenue growth and growth in operating margin to get a better idea. For value stocks, debt to equity can also give you a good picture. ROIC is also a good metric for both types of companies. There are also thousands of other metrics, not to mention qualitative data like who the CEO is that can help you value companies.
There's a break in your logic? Price isn't fixed by volume only it's a function of supply and demand. If more and more investors are holding onto stock, supply decreases does it not?
The Lonely CMDR in any market, price is determined at the margin. Price is comes from the agreement of any buyer and any seller in a public exchange. So if 2 people agree on a price and such is recorded, that becomes the official price until another transaction happens, even if 99.99% of the people don’t agree with that price and if all but one item was transacted. So price is not really determined by consensus or how many people are willing to buy, but how many DO buy. Now if every single holder of a stock tried to sell in a panic for example, then all the pool of stock that had remained put now bids on the price. If there is not enough dollar wanting to buy this stocks (your supply and demand point) then that will be reflected on the price. Since there is so much stock being offered relative to the amount of currency the price will go down. So you are right that if more is hoarded supply does go down, but unless there is big buying pressure, I don’t think this will affect the individual transaction that sets the price. But add to this if I am wrong
Excellent content as always Richard, lately the DJI and S&P500 made lifetime highs but I have never seen this much amount of caution by almost every analyst on the street. The yield curve is negative as well. I wonder if the amount of pessimism was the same during 2007. Got any take on all this? Maybe a future video?
11:10 Imagine a volume of trade 35% by value is made on the options and future contracts of each stock. That will certainly be problematic. And long before that, the market makers would probably adjust their modeling and therefore the bid/ask spreads according to the extent they would then be unable to hedge. The thing is, ETFs is still far from majority. And 35% synthetic doesn't mean literal 35% trade by value in derivatives either. Are the expense ratio fixed in the contract for these levered ETFs? Probably not right? One thing that will happen if the purchase of these ETFs cause excessive trading on options and futures is that the fund expenses will eat up the fund's value. And the effect may as well just end there. It'd be curious to see some modelling on what would happen if demands on these ETFs become excessive. It's still a non-factor at the moment.
So am I doing wrong if I want to put my money on a 3x leveraged ETF like TQQQ if this ETF is meant to follow the market and it's relatively stable compare to an oil ETF or commodities? I'm starting investing, so with this TQQQ I find diversification with a stable levegeraged gains... Please correct me If I'm wrong.
Fernando Orozco you're not wrong, but there is some material information you are missing that could affect your investment decision. There is something that occurs in leveraged ETF'S called "Beta Slippage," and I'm going to try to avoid complex terminology since you said you're just learning about investing, but essentially, in a really unstable market with no clear trend, the leveraged ETF will significantly undererform the asset it is tracking (in the case of TQQQ, it would underperform QQQ) However, the opposite applies in a trending market, as long as the trending market is stable (# of up days># of down days for a bull market, vise versa for a bear market). The issue is, this is only a partial reality and markets usually experience quite a bit of chop, even in trending markets Any sort of choppiness is what kills leveraged ETF'S, but this effect is usually overstated. As long as market volatility is low, and trending lower, the leveraged ETF has a place in a total portfolio.
@@Lakiman52 Thank you so much for this new info, that's why I'm not so interested in ETF's focused on commodities because of the high voladility they have because I'm more on the swing/long term investing side. That's what I like about this particularly ETF so I can gain more profit compared with the original index with some diversification and also I usually put a trailing stop to watch my potential losses and secure my gains when the trend reverse. But sometimes I'm not so sure if this is too good to be true, and thank you so much for your advice, now I can apply this advice to my investing strategy.
Fernando Orozco no problem, the only other thing I'd recommend is to not have TQQQ be your entire portfolio, because there is still some significant risk with leveraged ETF'S, it works significantly better if it's only a portion of a complete portfolio
@@fernandoorozco149 TQQQ doesn't really follow the market, it follows the nasdaq-100 which is market cap weighted, making the majority of the index made up of only 8 stocks. TQQQ could be quite vulnerable in a market nearing the end of a cycle. Say the doomsayers are correct and market makes a large correction, there would a large amount beta slippage due to TQQQs daily rebalancing and a trailing stop will probably not be able to protect you if the move is rapid enough.
Its generaly accepted assumption that:"the more time pass after last recession, the harder will be next recession" And its been a LONG time since 2008* If nothing going to fall next couple of years, than what kind of apocalipse should we expect when markets DO (finaly) fall? *in Russia last recession was in 2014, becoes oil, da. But Im concerned about US&EU economys (if something happen to them, who are we going to sell our oil to?)
рома иванов there was a recession in the US in the early 2000’s (after the dot com bubble) and the biggest recession came just a few years later in 2007. What is generally accepted isn’t necessarily true.
Few things are generally accepted in market behavior. I like to think crashes are like earthquakes - not entirely predictable but not entirely random either.
What I see is that people have conflated value capture and value creation so they don't recognize how little value is being created relative to the value being captured. Ultimately, there is more demand for stocks than the value creation those stocks represent. That is, if we recognized that a company's value is a function of the value it delivers to it's customers and not the value it captures for itself, we would see that all of the company's stocks are worth less than all of the investors' money.
Likely true. But that also assumes you assign full value to the investor's fiat currency. Truth is, it's all based on faith. But there isn't anything you can do about it anyway. All you can do is hope the music doesn't stop before you do. So far, so good.
@@jeffsetter213 I get that fiat currency is an IOU devoid of intrinsic value. I was implicitly denominating both sides in fiat currency because my point was not about how commerce should be transacted. My point was that if a company provides $100K of benefit to their customers but charges $1M and their stock sells for $10M, that is not a $10M company. Maybe at best that is a $500K company.
I am both. My 401 goes to Fidelity and is spread into different funds. I manage which funds to put it in but that's it. I also have money at Schwab where I actively manage. I have made both good and bad decisions. Still kicking myself for passing on Tesla at $30. I would have turned $600 to $85,000, but I didn't.
@@Christian-ki5js If you could beat the market, you're better than Warren Buffet. You can't pick winning stocks. Good luck to you in your approach, but don't say something like anyone saying you can't is wrong, when the data shows that over time, an investor in a passive fund beats the active investor consistently.
@@stevenstone307 yea yea. The average investor is an idiot. Half of people are better than them. I know very smart people who pick bad stocks and gamble. It's not easy, but it's simple. While I DO preach that most of your portfolio should be passive and that sector allocation is more important than stock picking, you're still giving an oversimplified reddit fallacy as your argument. Don't use averages and big data to try and argue what INDIVIDUALS can or cannot do. Warren buffet IS the market... how do you beat it when you are too big? Scale is very important but ignored by the beta ilk of "you cant beat the market" soy boy repeaters.
Are you Canadian? Because you discussed someone’s claim in a very classy way and your ending to the video surprised me. I wish more people discuss stuff like you 😊
Hold 15% of the stock market. That's quite vague. What does that 15% figure mean in actual money? That must be higher now in 2021. Another thing, when headlines say control half of the stock market, what is that referring to?
thx Bagel - appreciate your opinion - who knows - I am fulling the trigger in a month and just sit on cash till mid March, should nothing go to hell till then. China crisis - this index bubble - European energy crisis are all too many concerns for 1 cauldron to ignore
4 роки тому+9
"It's almost as if economics and finance are complicated fields! Who would've thought?" Hahaha I love it, I've watched many videos on this and am still very perplexed as to what to think. ETF's/Index funds certainly have similarities to CDO's as they package together multiple securities but are they really inflating the market? Hard to prove.
Entrepreneurial Finance You can "measure" inflated prices by comparing evaluations to the growth but this takes time and requires open and honest reporting.
What makes me worried about this is that after assets have been bundled off together it becomes harder to see the underlying value that supports the market price of the assets. Market price doesn't tend to be the best indicator of true value for an asset, as it's hard to tell if one will really get that value if they cash out. As for whether index funds have a bubble or not, it depends on whether the whole market is in a bubble or not. There's reason to believe that this is the case. Peter Zeihan has done a lot of videos on this, but the basic idea is that the market is glutted with retirement savings and foriegn capital flight, lowering interest rates and propping up asset values beyond what local incomes could support. This is only a bubble if the factors that are causing an inflated price are likely to suddenly change, and while I'm not sure about capital flight, retirement savings are going to decrease as a larger proportion of the US enters retirement.
I am just glad your didn't talk about CAPE and index ownership demographics. Index fund owners are so smart as long as we can get the Fed to continue to buy 3-5 percent of the bond market annually and maintain a 1 trillion dollars in margin debt then indexers will be fine. I do enjoy the shift from mutual funders to index funders. In the end yield is king and we will always use that for price discovery.
Well, they're better than mutual funds but not as good a strategy as selecting stocks which have a history of good dividend payments and represent significant barriers to entry.
"et al" is used in publishing when the article is written by multiple authors so if say there was a research done by a team of scientist they wouldn't list all of them. So in this case of "Cremers et al" its likely just that the first surname was Cremers in alphabetical order. Its a latin term that doesn't get much use outside of academia. Especially in exams where I don't have to remember the names of all the authors just one and can just cite "et al" and be done with LOL.
Yes, Jireh, but "et al" is used ONLY the second time that the same work and authors are mentioned. The first reference to that source must contain all authors.
The problem with ETF-ization of the market is that it can crush all names within the ETF that are more liquid. Basically, some underlying stocks have more bids and asks; more traded. Easier dump or buy than some other stocks inside the ETF. What happens is that outflows in one ETF can cause even the good stocks to get liquidated to payout cash outs of the ETFs. Entrance big, but the exit becomes small. An ETF in UK had a big impact when some underling stocks went down, and ETF withdrawals happened, it effected other stocks that were not part of the dip initially... because they were the only stocks actually liquid enough to make good on redemptions. It's why on very big up days EVERYTHING in ALL sectors go up. And on bad days particularly EVERYTHING takes a hit... even the good stuff. And if it's in the SPY or QQQ on those down days EVERYTHING literally is down... small exit... more liquid stocks are being dumped to make up for less liquid stocks.
Could you make a video talking about how the political unrest on some countries/regions affects the local and international markets? (For example, Hong Kong or Spain) Thanks!
Great video. If index funds and ETFs are mainly investments for retirement, there will be a great selling pressure in the years where retirees outnumber the work force right?
6:39 Can someone explain how price discovery would still be sufficient if 90% was piled into passive investment ETFs? This seems counter intuitive. To me when that happens, it's just a flow or momentum trade.
I had never thought about that before. The principle of a bubble is that you paid more than the actual value it's worth. ETF is a vehicle and the price you pay for it might not match the actual value of the underlying shares. What happens if the bubble bursts? You still have shares and the ETF would be back to matching the value of the shares. In my poor understanding, it will only affect the fact that you can buy more ETF. Which turns out to be great.
I like your videos so I've got a piece of constructive criticism: look at the camera more! Staring directly into the lens may feel weird, but it looks great on film! Keep up the cool vids!
If it's a passive bubble then why aren't the active investors selling the supposedly overvalued shares? If you're saying there's a "passive" bubble, then you're saying there's stock market bubble in general.
Happy Friday! What are your thoughts here? Are we in a bubble or are these claims nothing more than fear mongering? Let me know!
So am I doing wrong if I want to put my money on a 3x leveraged ETF like TQQQ if this ETF is meant to follow the market and it's
relatively stable compare to an oil ETF or commodities? I'm starting investing, so with this TQQQ I find diversification with a stable levegeraged gains...
Please correct me If I'm wrong.
The Plain Bagel, hey buddy great video very controversial!
I’m putting out a video a little later and I think there is validity in the ETF bubble since ETFs are sector based. Yes most are asset based but many are synthetic yes 100% derivative based and on top of that some of those are leveraged. This is what my video will be about these are defiantly in a bubble.
Fernando Orozco that’s a 3x leverages 100% derivative based so it’s insanely risky just FYI you make your own decision. My video is on that exact index.
Tom Isaacs ....in my opinion the questions you have to ask yourself are 1) "what is the empirical evidence on active vs passive investing?".....the answer is, on average, that after fees and expenses, active management tends to produce worse results!.....Now, that is on AVERAGE, so there are some good stock pickers who can, after fees and expenses, "beat the market", but they are few and far between and even fewer can do this consistently. (i.e. Investing is a long-term activity, so being lucky/good over one period, may not happen over thirty to forty periods ).
The second question is: "do you have a competitive advantage (or do you have access to someone who does)?....if the answer is yes, then active investing may be for you. If the answer is is no, then stick with passive investing. The problem here, is how to determine "competitive advantage"?....past history may or may not be a good indicator....will strategies that worked in one investment regime work in another?....How does their strategy change to,reflect different regimes?,,etc.
If enough people belive it is a bubble it will burst as one. If people are happy with passive investing on ETF and its derivatives and discard the idea of a bubble we will eventually be in one. To avoid a bubble we need balanced thinking on both sides :p but heck I am neither investor neither PhD. Thanks for you video it is really easy to watch and I feel I learned something
Micheal Burry, the man who has successfully predicted 55 of the last 2 financial crashes.
After is chip short last fall, someone should check on him
Holy LMAOOOOO
The market crash will occur after I begin investing for the first time
If your young enough to be investing for the first time and your not desperate for the money you can just ride out the crash. Index Funds will eventually recover their value unless the US economy completely and permanently falls apart
The market did crash after I invested for the first time and I just held on and averaged down and eventually exited from a few bad choices a year later with a fair profit.
I was just thinking the same thing lol
Currently down a couple hundred on an equity trade. Bought in at a new low of $15 and I thought I hit it smooth but it keeps going down. It concerned me but then I remembered that I'm an 18 year old college student with no dependents and about 85% disposable income so. Even if it does crash when you begin, just buy more lol see it as an opportunity.
Lmao!
This was an excellent nuanced discussion of a poorly understood topic. Well done, Richard!
Thanks Ben!
Ben Felix true well spoken
I love this simulation where my favourite finance-related youtubers get to discuss with one another.
Keep up the good work you both!
@@ThePlainBagel Whew! I was worried Ben was going to give you grief for coming out as an *active investor* ... dun dun dunnn! :D
Ben would not give "grief", Ben will just hand over the Peer reviewed papers and throw words like "CAPM" or "%-factor" at him until the problem goes away xD
Everyone tells us to diversify, there’s nothing more diversified than investing across the index
I’ve read that “diversity” ends after about 12-13 funds.
@Bastian 111 sure, the more the better. It’s hard to know what will do well. Every time I buy an individual asset It craters so I might be cursed
If you're diversifying for risk management, you should also look into stocks with a negative beta (move opposite to market), or hedge with shorts (I don't advise shorting) or puts. As someone here mentioned, gold and bonds are also great diversification tools (in a bull market they are often overlooked for their low return). But just keeping a healthy percentage of cash is also risk management.
@@senne5699 shorts are too scary for me , but you’re other ideas sound good to me. Thanks
The ultimate diversity is weight averaged total market index. But that's too diversified in that it assumes no one stock will do better than any other, which doesn't really make a whole lot of sense anyways. So just using any normal index fund should be fine, or just everyone's favorite, an SP500 fund.
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.
I'm Chinese living in Australia, so Im heavily invested in three markets including the US. However I dont think my portfolio will survive a US disintegration lol The Aus market follows US to the beat, and the Chinese market gets moved by foreign investors(US) regularly.
Every country does well until it doesn't. The past tells you nothing about the future.
The market could plateau, crash and start growing again but you have no assurance it will exceed the original plateau limit
except japan never recoverred
Japans index is not likvid and open for foreign retail investors. That is it is mostly just profesjonals investing there and lokals who where broke in the 90s. The us economy is ALOT larger and is globaly ownd. That is the whole planet buys dollars, apple stock and s&p500 etfs and indexfunds
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
Sean Lei - Money & Minimalism you’re a genius. How do you do it!
If that happens I suggest diversifying into canned beans and 5.56 cal.
@@Swarm509 Eat the beans then sayoonara?
@ The best low-cost passive index funds have
J White Are you proposing to invest in individual stocks to avoid a .04% expense ratio? You could beat an index fund but the chances of beating a diversified, broad index are *very slim*. This is why so many stock pickers perform so poorly. Also I wouldn’t go so far as to say stocks are extremely illiquid. Equity tied to houses are extremely illiquid, but for stocks you just sell them and wait a few days to transfer to your bank account. In the event of a recession and the economy tanks, there may be more (panic) sellers than buyers, but as warren buffet says the smart investors will simply continue to hold their assets and buy more.
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
Based on that data do you believe shorting index funds back in 2019 could be a good decision?
@@erickzts Imho no unless you knew about the chinese virus and the impact it was going to have
@@erickzts 🤣
S&P 500 just hit all time high of 5,000 today on 2/9/24. It seems we are walking on thin ice right now.
@piewert787 it definitely will crash at some point, the line cannot go up forever, but that doesn't mean it's an index bubble.
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.
65% are « market timers». Of the people buying etfs and indexfunds. Thats the main reason they lose over time. People panic and are addicted to short term gratification and the obsession of wanting to predict the markets and politics in the short term. The mix of anxiety, envy, greed, panic is the main movers in the markets.
Yeah the expense ratio is drastically lower with etf’s
Fuck yeah, and Ramit Sethi.
Yeah but buffet recommends putting money into the s & p 500 not all the nonsense ETFs out there
I'll be writing a research paper on this, or more about how ETFs are taking away clients from bad investment managers.
Interesting thesis. That would be a long term plus for active investment as trust is restored.
Is that an original thesis? Not really. That debate has been going on in the discipline for years. However, you should consider that although index funds and ETF's are empowering the Ordinary Joe to passively invest, he might just be jumping from the frying pan of poorly performing active fund managers into the fire of badly index designers. Remember, the Ordinary Joe barely understands how the underlying assets of IFs/ETFs are structured, or how sound the indexes are. But, they're easy right? Index Funds are considered to be safer than ETFs, and there's possibly a very good reason for this: probably a lot of those poorly performing Active Asset Fund Managers have been following indices in the main and limiting their exposure to more risky investments. i.e. They been hedging their bets, hence the underwhelming performance.
I would like a copy of your report
Very interesting topic, take note of how AALTX has a load, while VFIFX does not have a load. Good luck.
@@BigHenFor I dont think all those issues are relevant for "ordinary joe", after all it just tracks some top companies based on some criteria and there are so many ETFs that it kind of is an active purchase...statistical research has shown that active funds only sometimes beat related ETF (maybe 5% of them, dont remember exactly) and almost none of them are able to do it time and time again up to a point of it being almost impossible for ordinary joe to find such active fund (for example in my country in EU there are maybe 1000 active funds and NONE of those beat the market, the difference vs ETFs is like 3-4% PER YEAR - just do the math in 10 year scenario)....the key for Ordinary Joe is not to pick the best option but to avoid mistakes (just like in tennis for example, better players on average are those who do less mistakes not those who actively beat the opponent by great strikes)
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.
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!
So true
What you're saying is true but it isn't any different than what people like Burry are saying. Passive ETFs are creating a bubble, not exclusive to passive ETFs but to the market as a whole. Anyway, it's not true anyways. There will always be price discovery. Look at daily, weekly, monthly movements in s&p 500 stocks individually. They don't move up and down together in unison.
Will Roberts you clearly don’t understand how they work.
Fund managers have algorithms that you don't have. There are some robo investing tech with extremely low fees, but typically they just do weak tax harvesting techniques and also do nothing more than active rebalancing.
Active investing through advisors use tactical investing strategies over strategic investing. And even then, robo investing people, invest emotionally still. Your advisor is supposed to keep your emotions in check and keep you on track, mentally and emotionally, and financially.
Now, it's true that the underlying investments would have to fail first for the etf market to burst. Makes the most logical sense.
And couldn't the same thing be said about mutual funds??
The underlying stocks may be more liquid and easier to sell, but I don't know why the underlying stocks would be more liquid to sell than the etf? You can explain that part to me.
Ooooo the ETFs can be in a bubble! Because etf trade on their own and the trading (buying and selling) is what make the price go up and down, so if ETFs are trading more than the underlying investment, then the value of the ETF can begin to pull away and be different than the underlying investment.
So if the prices increase soooooo much more than the underlying invest, when the underlying invest fails, then the etf will tank exponentially more than the underlying invest, percentage wise.
He mentions arbitrage, which can work only in bull markets.
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.
Regulation ALLOWED high risk lending, whereas high risk lending would happen in private market regardless. So you are also going too far to the opposite extreme.
Need example? What do you think loan sharks are?
@@dailyrant4068 they lent to high risk people because the government guaranteed them pay outs if the people couldn't afford payment. these guys aren't dumb, they would only lend money to certain people if they knew they would be reimbursed by the state. not a good business model to lend money to people who can't afford to pay you back, right?
You hear "regulation" and assume it's bad, instead of assuming that there's good and bad regulations.
Don't spread your bias
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.
As always, great discussion on a complex topic. I’m not worried about a bubble..... 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.
This. Even now in July 2021.
If it crashes, I will buy a lot. If it does not, I will buy just a little.
If it crashes you keep the money in, there no way the entire S&P 500 fails
@@owenferraraExactly, if the committee sees failing companies they remove it from the 500 list. And replace it with higher valued ones
Just buy every month a little.
@@owenferrara it already did
@@tomuxp1 My comment still stands. Leave it in. It will recover. Will it be a quick recovery? No. Will it happen? Yes. Should you take your money out right now? Absolutely not
Too many fortune tellers in the financial market... One of them is very likely to be right, but a priori can you tell who?
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.
Duh, S&P 500 P/E is 40.
So long as the invested money isn't borrowed money, it won't explode disastrously. It may still go down or up, but every crash in history has been caused by major borrowing in the belief that people will make easy money. Passive investing doesn't really work that way. It's usually people taking the top part of their paycheck and then spreading it across the market. That means it can be directly affected by other market forces, other bubbles, but in of itself can only provide capital gains because it's already the investor's money. There's no credit or loan to be paid back that the investor would default on causing a devastating crash. It's not the collapse of the market that causes a recession or a depression, it's the inability to pay back the debt.
Of course a hedge fund manager would call them a bubble. Hedge fund managers can't out perform the rates of ETFs
cartiphulis Burry’s hedge fund closed in 2008.
@@asmrbill5931 He still runs a hedge fund
and the pandemic triggered the crash.you get an L my friend.
For anyone who doesn’t understand why people don’t like ETFs.
1. If everyone buys into any one thing at a high enough rate there will be a liquidity issue sooner or later
2. Passive investing means that you aren’t actually evaluating whether a company is worthy of your investment or not, you’re simply deciding that if your portfolio is diversified enough, you are ok with losing on some of those companies because another one will be added to the fund.
3. Prices increase for Individual stocks when added to an index even though said company may not deserve your investment. So you effectively have stocks in your portfolio just to say that your portfolio is diverse and not because you believe every individual stock in the portfolio is a good investment.
4. If everyone is invested into ANYTHING, do some research and you’ll see that that’s not necessarily the way to go (1987, DotComBubble, 2008) and holding the opposite side of the majority has always panned out for those who do the requisite research.
@@leocriss6354 I get what you're saying but I truly believe that lots of these so called stocks that end up being listed in the indexes are actually the result of active investors. Surely we can all agree that Tesla doesn't deserve the hype it has right? As a result sooner or later is bound to be in the S&P 500 and a result of that will be it will be added to the big indexes. They say time is money and I rather the rest of the people decide where they spend their time. I'll just choose the basket that they themselves chose to be in the position for me to put my money. Will I put my savings on the tech sector? Probably not yet I see people put 100's of thousands behind one specific stock. Nowadays to become a billion dollar enterprise all you have to say is that you smelled the insides of a new Tesla car. Doge to the moon and what not. The bubble is elsewhere imo. Nobody making a movie out of the indexers anytime soon, meanwhile Burry making a cameo in this GME fiasco.
I have beaten Micheals returns for the last nine years so I will just keep on keeping on.
All knowledge aside, not only is this video quite informative, the comments are surprisingly academic and constructive too.
Still, thanks for the info! I just started investing last March, and I’d like to know the rundown of all things finance.
I'm watching this is in 2021 and the bubble has burst right now.
Lol wut it is a bed rock bubble it can not pop
Dude, this video dates back BEFORE the Covid Panic. Nothing you see has anything to do with the theory discussed.
The main reason I’ve got into ETFs and Unit trusts really centres my circumstances. I’m 24 and just graduated from University. I have put some of my savings into investments but the majority (approx 3/4s) into a savings account so I can put down a deposit on a property sometime in the new year.
So from my view, I’m A) just starting out and B) have very limited capital at risk. Therefore, I’m happy to accept short term losses as I’m planning to be in the game for decades yet.
So to me, ETFs and UTs are a good way of exposing myself to varied and diversified investments without paying through the nose in commission. As I get pay checks each month and save more, I may look at switching more to the underline investments more. At the moment UTs are particularly valuable to me as they only have a single daily valuation point. So it’s easy to keep track of how things are going.
Would appreciate any thoughts people have on this approach.
How’s it been?
@@belt1749 worked pretty well since I wrote this thanks.
Warren Buffett recommends index funds since many years, he knew if you hype up something it will become a bubble, he indirectly made it a bubble
Michael burry is actually a good guy here
What puzzles me is that people are STILL listening to these "financial gurus" as if they can read the future, meanwhile they engineer the future with their own narratives, for their own personal gain, and at the expenses of the majority of their listeners.
Give me your ice and I will give you water, basically.
@@nachannachle2706 exactly
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.
Agreed , with all the data and knowledge accumulated I still believe that it is extremely hard to predict a bubble . There are so many factors that come into play and so much complexity.
Et al is just latin for "and others" many financial papers since they have multiple authors, will use et al instead of listing the names of everyone who contributed.
Wrong! Et al is a polymath who has published more papers than anyone else in history.
Burn Er Heard he’s best friends with Feat.
@@stevenfung1333 starring has been real quiet since the feat. mixtape
You should revisit this topic cuz this bull runs starting to get scary
"Regulation also played a key role in encouraging banks to lend to lower credit borrowers"... needs to be discussed more, but it can get political at that point. So people, just do your research ;)
It turned out the risk models of banks weren't racist after all. :)
Thank you for the video! Very informative! Certain indicators do point out the bubble formation, in my opinion. All market cap weighted index funds blindly track equities based on their benchmark indices, irrespective of the dependability of the underlying stocks. A few examples/facts that are frustrating about index funds are as follows:
iShares Russell 2000 Value ETF (IWN) and iShares Russell 2000 ETF (IWM) are now both tracking AMC as it's Rank 1 holding, only because this meme stock gained a higher rank based on market cap, only in the last few months. Both the above ETFs also used to track GameStop (GME) in their top 10 holdings for many months this year, but now, the attention seems to have shifted to AMC. Index funds do not care for volatility / turnover within the index caused by market cap changes. Also remember that indices are fully actively managed, in that, someone makes a decision to add or kick out a stock, so there is risk involved. The fund itself is termed as low cost, obviously because the allocation is all automated, but the risk is there because you are 100% relying on the decision made in the index.
All Large Cap Growth ETFs, you name it, Vanguard, Blackrock etc, have all been tracking Tesla which is in the top 5 rank since last year, because it got promoted to S&P500. Tesla is still a questionable stock for it's reliability based on the high speculation and overvaluation! Tesla has huge volatility and uncertainty, and to put a large chunk of your retirement savings in Tesla via an index ETF is not very comforting! The decision to promote Tesla to S&P500 top 10 was very brash in my opinion.
For anyone invested in index funds, they are inevitably forced to invest their money indirectly in meme stocks or stocks that are overvalued because a market cap weighted index tracks it!
Risk Levels from least to highest: 1. Savings practically no risk - Very low profit, 2. Bonds minute risk - minute profit, 3. ETF, Index funds - slightly risky - passive profit, 4, Dividends - Risky - greater profit/value, 5. Growth stocks - Very risky - Fantasic profit and 6. Collapased/Bankrupt companies - Incredibly High risk - Incredible growth. Lets highlight as you go up the scale from 1 upwards your profit gets bigger and bigger however, with that the fall is much bigger too. Overall its where your boundaries lie.
Cremers and others
Aurko Mitra I laughed so hard at that part, but no one else in the comments seemed to notice hahaha
I always come to this channel for a nuanced and sober opinion on investment topics. Well done.
I was concerned then I saw this video came out 4 years ago 😂
As a Canadian, I would never short our banks. They have really influenced the general public that they have their best interest in mind with investing. They do not but people think they do.
People are putting a lot of weight on the opinion of a guy that got it right once.
You speak of him as if he's your ordinary individual investor. The man is a hedgefund manager. A very credible one at that.
Twice actually...
Well, we should invest for 20-30+ years though, right ?
End of the day, the value of the company we buy has not much to do with the price we pay.
Quote: Price is what you pay, value is what you get. --Warren Buffett
Warren can afford 2 Ts in his name.
pgo eds 🤣
The influx into these funds is driven in part by low interest rates on term deposits. Those who aren't active investors are looking for a return on their savings
This has become my favorite channel on UA-cam lol. Great job as usual.
This kinda goes along the lines of inflation. Because a lot of people recognize a store of value that store of value is overvalued than it should over decades
4 years later . . . no bubble
Still no bubble 2024 September
Bat in soup: "index bubble? That's cute"
nice comment . nice thinking . index is bubble and so are buy back shares. get ready mate save yourself
it's actually not because of bat soup, technically if you cook it you can eat any animals provided they really are safe to eat and had no poison like pufferfish. purpose of cooking is to kill virus or other harmful bacteria though this include good bacteria too.
one of main reason is the market hold live animals and that what the cause of it
haha I mean, rona actually did help correct the market
@@carval51 maybe the animal was not well cooked.
But i dont believe that it was some animal in a soup that caused this pandemic.
@@davidmella1174 there multiple hypothesis
2 that I believe likely is
1. lab where they actually did test a new virus to cure it but the handling is bad which something usual in china either the animal escape or sold again to make some extra buck for people working in the lab resulting in the spread.
2. it just new diseases happen to be mutated from animal to human since the market is full variety of animals that are mostly not treated.
Always appreciate your thoughtful analysis and explanation! I'm a pretty big passive investor too. Although there isn't a large amount of trade volumes, what do you think would happen if there's a large sell off and ETF holders decide to sell? I think that scenario could lead to a more precipitous fall on the underlying securities.
Trying to find individual stocks to buy = bad, buying the whole market instead = bad. WTF are amateurs supposed to do?!
Love your work because of your excellent ability to breakdown complicated topics!
btw, I found you during my CFA Level 1 studies and it helped me understand some of the more challenging topics within the Equity and Fixed Income sections; happy to report that I passed Level 1 and moving on to Level 2 this upcoming June!
I appreciate your work!
Re: Arbitrage: that's.. how ETFs are designed? That process is the whole point! The AP doesn't create/redeem shares; it just collects the underlying shares, delivers them to the fund company in exchange for new ETF shares ( Like for a mutual fund.. the difference is with ETFs only one participant is authorized, what is called, surprisingly, Authorized Participant. ), and then sells those shares. The trades the AP is doing are the exact same as the ones you described. That's how the AP is paid for their role in the ETF.
The effect is normal: If you are buying a "basket of stocks" , that should have the exact same effect on the stocks' price, regardless of that basked being a mutual fund, an ETF, or simply just the actual set of stocks.
Awesome video. Great job staying away from fear mongering, everyone tries to make a name for themselves trying to call the next “bubble” when in reality if anyone had any real evidence and publicized a bubble, that itself would deflate the bubble before it pops. They’ve been calling for the next crash since I started investing in 2012, and if you listened to those trying to sell you fear you would’ve missed out on 7 years of solid bull market. It’s always time in the market, not timing or trying to call a bubble.
its funny how we think just because a person has been right once they must be right every time. same as when a stock is @ an ATH people assume it will continue to rise.
love the videos, and I admire the segway from pure animations to videos of yourself... good content... keep it up!!!!!!!
1. Index funds are not just for beginners, that's a classic trap to fall into. 2. America is 10x the size of Canada so it probably doesn't matter much on the world stage that Canadians buy more active funds. In Canada, for years, we've had much higher management fees/MERs, often around 2.5% but sometimes 2.8%. Smaller funds, lower economies of scale, less investor sophistication, a network of advisors that have an interest in keeping MERs high as well to fund their offices, computer networks, promotional jackets and mousepads and advisor trips to Spain and so on. When our dollar was at or above par with the US dollar some years back, Lexus Canada was asked why a certain vehicle here was $80,000 when a Canadian could drive across the border and buy the same vehicle for $50,000. They said Canadians tell them that they want to pay more, for status, for prestige. That was the end of the discussion. So Canada is a funny market in ways. 3. Typo at 11:28 on the word derivatives, you may want to fix that. I've been investing since 1998 when I was 20 and I still don't understand what Burry is saying here. I mean, I get the terms and the conversation about it, but I still don't get it. I loved the Big Short, I got that, but an index fund bubble, I can't comprehend it. Even after your video, I am no closer to understanding his point. For point number 1: ca.finance.yahoo.com/news/warren-buffett-thinks-apos-elite-193700282.html
Nice to see you and Ben Felix working together making videos. 2 of my favourite finance channels here.
I am rewatching this video at 4:30am, because I was worrying about my index-ETF investments and kids' futures... I thank you!
I really like your channel. I learn so much from it. Not only the content is great, but the way it is presented is very compelling and the videos are so well put together. Thank you so much. Keep the good work.
2022 says 'yes' index funds were in a bubble. And bonds. And real estate. And crypto.
But what about Bagel index? Is it overinflated, ready to burst?
Well, I'm not supposed to give my opinion on this channel, but the bagel index is always a sound investment
I don’t understand, if the creation of more units of the index funds means that they have to go out and buy more of those companies then is the existence of index funds artificially pushing those prices up? And every time somebody buys into an index fund, for example once a month on payday, then doesn’t the index fund go out and purchase more shares? So the buying of index funds once a month forcibly means the purchasing of those underlying securities. Unless nobody is actually buying and holding and they’re all just selling their index funds to all the time which would completely defeat the purpose of the whole buy and hold strategy
Spot. On.
- some dude that works in futures
You work with futures? Proof it by telling the future
Your example on ETF share arbitrage appears to communicate a wrong message.
We start with the inflated ETF share price of $15 and the underlyings valued at $10. When the AP creates more ETF shares and sells them to the public he will have to buy the shares indirectly in the open market, thus the underlying will also rise lets say to $12.5 while the ETF price will drop to ~$12.5.
But the same goes for the ETF share arbitrage: the guy selling the ETF share while buying the underlying shares in the open market will do exactly the same, i.e. lower the ETF share price to ~$12.50 and raise the underlying shares to ~12.50
In the end, I don't see any valid reason why the AP share creation/redemption should be less harmful than someone else doing some arbitrage.
Read a FT article that took the opposite away, managed funds were in a bubble which has started to burst due to index funds and over charging consumers.
happen to remember the name of that article? would like to read it.
A very good topic to get into. I like investing in both index funds and individual stock (mostly value for both). They both produce, and they both make money. Value index funds currently are underperforming compared to total index funds, but that's okay as long as I know it's safer during bear markets or recessions. And I know my stocks I pick as value are safer than others. Bubbles are a scary topic, but if we keep investing in value, the bubbles that are created are nearly nonexistent, and if they do happen it's minimal.
wow. the more i watch the real bagel, the more i realise how risky i've been with my stocks and how little i really know.
Really interesting topic for many European ETF investors like myself. Unfortunately, my broker doesn't have any non-synthetic ETF offer mimicking NASDAQ 100 and I understand many European brokers have this problem due to EU regulations. So let's hope we won't see a crash in synthetic ETFs like we saw with CDOs.
Fingers crossed!
😆
This was exactly the video I was looking for! Thank you
I understand the argument, but it is self correcting. If prices of stocks in the index fund get out of line with their fundamental value active investors will buy or sell the stock bringing it back in line with its fundamental value.
7:55 "Cremers et al (2016)" is a citing term for Cremers and all other authors/writers.
I'm sure you knew that. You just seemed confused.
What comes to Eisman, there's this famous quote from Keynes: “Markets can stay irrational longer than you can stay solvent." To me that really materializes the problem with timing bubbles. It's not enough to know something is a bubble (even if that is very hard by itself), but you'd also need to somehow know when the correction will happen. This also almost bankrupted Burry as he was burning money every day leading to the crash. Not sure for how much longer he could have held his swap positions. And as we see in the movie, everyone was not happy waiting...
To me it seems shorting even something that's a "well-known bubble", especially with lever, seems like a financial suicide as you're almost certain to get knocked out as the underlying increases in value before the correction happens. If it ever happens. You might be right, but can you stay solvent until the market agrees with you? Being right is a sad win if you're already bankrupt 😅
To me one of these was Tesla stock. I was certain for months that it's overpriced on the market, but having no clue when it would correct itself, could not really position myself to benefit out of it in any way. Well, at least I didn't go long on it on the top like so many others 🙏
There are a number of things contributing to the US being in a bubble. One thing in particular is that the fed keeps printing money and doing these repo operations which it dubs "permanent open market operations." The reason they keep doing this is precisely because of a lack of liquidity in the market. A quick look at the history of federal expenses in the past 3-5 years will show that of the revenue the government collects, the amount spent on interest payments is has increased dramatically from somewhere around $237B to around $332B (I don't remember the exact figures). If interest rates go up, then the government will have to default on its debt, which would crash the global economy. They can't cut spending for some reason, and they don't raise taxes because that's unpopular. Once interest rates go to zero, they will be able to do nothing EXCEPT print money, and they will try to print their way out of debt, which will devalue the dollar. These POMO have driven the S&P 500 higher, and note that this is not the result of stronger manufacturing, increased sales or earnings of companies, or higher consumer demand.
great comparison of CDOs & index funds- people really need to understand how fundamentally different they are, despite being similar from a broad POV
I've always loved ETFs, but am 100% in equities now. I've seen a variety of smart people who disagree with him (and some who agree, lol). I'll just keep investing in quality companies.
How do you evaluate a quality company in the era of Ubers and WeWorks; and a complete lottery of new fields (space, AI, genetics)
TankingShaman evaluate their free cash flow? Neglect the negative FCF companies. You’ll be safe.
@@the_primal_instinct I do extensive videos about how I evaluate them :)
@@fadhilhabibie6392 FCF yield is a good way to evaluate value companies, but this isn't the only way to value companies. Especially not growth companies like Tesla. You have to look at revenue growth and growth in operating margin to get a better idea. For value stocks, debt to equity can also give you a good picture. ROIC is also a good metric for both types of companies. There are also thousands of other metrics, not to mention qualitative data like who the CEO is that can help you value companies.
There's a break in your logic?
Price isn't fixed by volume only it's a function of supply and demand. If more and more investors are holding onto stock, supply decreases does it not?
The Lonely CMDR in any market, price is determined at the margin. Price is comes from the agreement of any buyer and any seller in a public exchange. So if 2 people agree on a price and such is recorded, that becomes the official price until another transaction happens, even if 99.99% of the people don’t agree with that price and if all but one item was transacted. So price is not really determined by consensus or how many people are willing to buy, but how many DO buy.
Now if every single holder of a stock tried to sell in a panic for example, then all the pool of stock that had remained put now bids on the price. If there is not enough dollar wanting to buy this stocks (your supply and demand point) then that will be reflected on the price. Since there is so much stock being offered relative to the amount of currency the price will go down. So you are right that if more is hoarded supply does go down, but unless there is big buying pressure, I don’t think this will affect the individual transaction that sets the price. But add to this if I am wrong
Excellent content as always Richard, lately the DJI and S&P500 made lifetime highs but I have never seen this much amount of caution by almost every analyst on the street. The yield curve is negative as well. I wonder if the amount of pessimism was the same during 2007. Got any take on all this? Maybe a future video?
11:10 Imagine a volume of trade 35% by value is made on the options and future contracts of each stock. That will certainly be problematic. And long before that, the market makers would probably adjust their modeling and therefore the bid/ask spreads according to the extent they would then be unable to hedge. The thing is, ETFs is still far from majority. And 35% synthetic doesn't mean literal 35% trade by value in derivatives either. Are the expense ratio fixed in the contract for these levered ETFs? Probably not right? One thing that will happen if the purchase of these ETFs cause excessive trading on options and futures is that the fund expenses will eat up the fund's value. And the effect may as well just end there. It'd be curious to see some modelling on what would happen if demands on these ETFs become excessive. It's still a non-factor at the moment.
So am I doing wrong if I want to put my money on a 3x leveraged ETF like TQQQ if this ETF is meant to follow the market and it's
relatively stable compare to an oil ETF or commodities? I'm starting investing, so with this TQQQ I find diversification with a stable levegeraged gains...
Please correct me If I'm wrong.
Fernando Orozco you're not wrong, but there is some material information you are missing that could affect your investment decision. There is something that occurs in leveraged ETF'S called "Beta Slippage," and I'm going to try to avoid complex terminology since you said you're just learning about investing, but essentially, in a really unstable market with no clear trend, the leveraged ETF will significantly undererform the asset it is tracking (in the case of TQQQ, it would underperform QQQ)
However, the opposite applies in a trending market, as long as the trending market is stable (# of up days># of down days for a bull market, vise versa for a bear market). The issue is, this is only a partial reality and markets usually experience quite a bit of chop, even in trending markets
Any sort of choppiness is what kills leveraged ETF'S, but this effect is usually overstated. As long as market volatility is low, and trending lower, the leveraged ETF has a place in a total portfolio.
@@Lakiman52 Thank you so much for this new info, that's why I'm not so interested in ETF's focused on commodities because of the high voladility they have because I'm more on the swing/long term investing side.
That's what I like about this particularly ETF so I can gain more profit compared with the original index with some diversification and also I usually put a trailing stop to watch my potential losses and secure my gains when the trend reverse.
But sometimes I'm not so sure if this is too good to be true, and thank you so much for your advice, now I can apply this advice to my investing strategy.
Fernando Orozco no problem, the only other thing I'd recommend is to not have TQQQ be your entire portfolio, because there is still some significant risk with leveraged ETF'S, it works significantly better if it's only a portion of a complete portfolio
@@fernandoorozco149 TQQQ doesn't really follow the market, it follows the nasdaq-100 which is market cap weighted, making the majority of the index made up of only 8 stocks. TQQQ could be quite vulnerable in a market nearing the end of a cycle. Say the doomsayers are correct and market makes a large correction, there would a large amount beta slippage due to TQQQs daily rebalancing and a trailing stop will probably not be able to protect you if the move is rapid enough.
It’s skewing the market yes and my worry. Still a role for an active picker, just branding index’s rather than funds.
Its generaly accepted assumption that:"the more time pass after last recession, the harder will be next recession"
And its been a LONG time since 2008*
If nothing going to fall next couple of years, than what kind of apocalipse should we expect when markets DO (finaly) fall?
*in Russia last recession was in 2014, becoes oil, da. But Im concerned about US&EU economys (if something happen to them, who are we going to sell our oil to?)
рома иванов there was a recession in the US in the early 2000’s (after the dot com bubble) and the biggest recession came just a few years later in 2007. What is generally accepted isn’t necessarily true.
Few things are generally accepted in market behavior. I like to think crashes are like earthquakes - not entirely predictable but not entirely random either.
What is really "harder", a sharp fall and recovery, or a decade long gradual decline?
That's precisely how GLOBALISATION makes everything trading and finance extremely complicated to make sense of and/or predict.
What I see is that people have conflated value capture and value creation so they don't recognize how little value is being created relative to the value being captured. Ultimately, there is more demand for stocks than the value creation those stocks represent. That is, if we recognized that a company's value is a function of the value it delivers to it's customers and not the value it captures for itself, we would see that all of the company's stocks are worth less than all of the investors' money.
Likely true. But that also assumes you assign full value to the investor's fiat currency.
Truth is, it's all based on faith. But there isn't anything you can do about it anyway. All you can do is hope the music doesn't stop before you do. So far, so good.
@@jeffsetter213 I get that fiat currency is an IOU devoid of intrinsic value. I was implicitly denominating both sides in fiat currency because my point was not about how commerce should be transacted. My point was that if a company provides $100K of benefit to their customers but charges $1M and their stock sells for $10M, that is not a $10M company. Maybe at best that is a $500K company.
you're an active investor?! gasp. stone him!
jk. Can you do a video about how you rationalize being an active investor?
Passive is for beginners, watch peter lynch. The goal is to beat the market, don't listen to anyone who says you can't.
I am both. My 401 goes to Fidelity and is spread into different funds. I manage which funds to put it in but that's it. I also have money at Schwab where I actively manage. I have made both good and bad decisions. Still kicking myself for passing on Tesla at $30. I would have turned $600 to $85,000, but I didn't.
@@Christian-ki5js If you could beat the market, you're better than Warren Buffet. You can't pick winning stocks. Good luck to you in your approach, but don't say something like anyone saying you can't is wrong, when the data shows that over time, an investor in a passive fund beats the active investor consistently.
@@stevenstone307 yea yea. The average investor is an idiot. Half of people are better than them. I know very smart people who pick bad stocks and gamble. It's not easy, but it's simple. While I DO preach that most of your portfolio should be passive and that sector allocation is more important than stock picking, you're still giving an oversimplified reddit fallacy as your argument. Don't use averages and big data to try and argue what INDIVIDUALS can or cannot do.
Warren buffet IS the market... how do you beat it when you are too big? Scale is very important but ignored by the beta ilk of "you cant beat the market" soy boy repeaters.
@@Christian-ki5js haha good luck to you
Are you Canadian? Because you discussed someone’s claim in a very classy way and your ending to the video surprised me. I wish more people discuss stuff like you 😊
Richard, your humbleness and knowledge is inspiring! Keep up the good work!
Hold 15% of the stock market. That's quite vague. What does that 15% figure mean in actual money? That must be higher now in 2021. Another thing, when headlines say control half of the stock market, what is that referring to?
I know very little about economics, but this was still a very clear and understandable discussion of a topic I have never heard about. Excellent work!
thx Bagel - appreciate your opinion - who knows - I am fulling the trigger in a month and just sit on cash till mid March, should nothing go to hell till then. China crisis - this index bubble - European energy crisis are all too many concerns for 1 cauldron to ignore
"It's almost as if economics and finance are complicated fields! Who would've thought?" Hahaha I love it, I've watched many videos on this and am still very perplexed as to what to think. ETF's/Index funds certainly have similarities to CDO's as they package together multiple securities but are they really inflating the market? Hard to prove.
Entrepreneurial Finance
You can "measure" inflated prices by comparing evaluations to the growth but this takes time and requires open and honest reporting.
What makes me worried about this is that after assets have been bundled off together it becomes harder to see the underlying value that supports the market price of the assets. Market price doesn't tend to be the best indicator of true value for an asset, as it's hard to tell if one will really get that value if they cash out.
As for whether index funds have a bubble or not, it depends on whether the whole market is in a bubble or not. There's reason to believe that this is the case. Peter Zeihan has done a lot of videos on this, but the basic idea is that the market is glutted with retirement savings and foriegn capital flight, lowering interest rates and propping up asset values beyond what local incomes could support. This is only a bubble if the factors that are causing an inflated price are likely to suddenly change, and while I'm not sure about capital flight, retirement savings are going to decrease as a larger proportion of the US enters retirement.
I am just glad your didn't talk about CAPE and index ownership demographics. Index fund owners are so smart as long as we can get the Fed to continue to buy 3-5 percent of the bond market annually and maintain a 1 trillion dollars in margin debt then indexers will be fine. I do enjoy the shift from mutual funders to index funders. In the end yield is king and we will always use that for price discovery.
7:55 great edit
Well, they're better than mutual funds but not as good a strategy as selecting stocks which have a history of good dividend payments and represent significant barriers to entry.
"et al" is used in publishing when the article is written by multiple authors so if say there was a research done by a team of scientist they wouldn't list all of them. So in this case of "Cremers et al" its likely just that the first surname was Cremers in alphabetical order. Its a latin term that doesn't get much use outside of academia. Especially in exams where I don't have to remember the names of all the authors just one and can just cite "et al" and be done with LOL.
Yea I'm familiar with it's meaning, just stumbled on how to pronounce it haha
Yes, Jireh, but "et al" is used ONLY the second time that the same work and authors are mentioned. The first reference to that source must contain all authors.
@@corn_pop6082 there are different citation techniques
Great video, did any of these challenges happen during the initial stages of the Corona sell offs. ?
Hmm, this did not age well?
@Tahir look up reverse repos and short on everything
Index funds don’t change the relative valuations of the companies being purchased because they buy in market cap weights.
Index funds are only 15% of stock market, and 5% of daily trading volume!
The problem with ETF-ization of the market is that it can crush all names within the ETF that are more liquid.
Basically, some underlying stocks have more bids and asks; more traded. Easier dump or buy than some other stocks inside the ETF.
What happens is that outflows in one ETF can cause even the good stocks to get liquidated to payout cash outs of the ETFs.
Entrance big, but the exit becomes small.
An ETF in UK had a big impact when some underling stocks went down, and ETF withdrawals happened, it effected other stocks that were not part of the dip initially... because they were the only stocks actually liquid enough to make good on redemptions.
It's why on very big up days EVERYTHING in ALL sectors go up. And on bad days particularly EVERYTHING takes a hit... even the good stuff. And if it's in the SPY or QQQ on those down days EVERYTHING literally is down... small exit... more liquid stocks are being dumped to make up for less liquid stocks.
Could you make a video talking about how the political unrest on some countries/regions affects the local and international markets? (For example, Hong Kong or Spain)
Thanks!
Great video. If index funds and ETFs are mainly investments for retirement, there will be a great selling pressure in the years where retirees outnumber the work force right?
6:39 Can someone explain how price discovery would still be sufficient if 90% was piled into passive investment ETFs? This seems counter intuitive. To me when that happens, it's just a flow or momentum trade.
If the guy who effectively created the first index fund says index funds will be fine at 90%, you might want to take it with a grain of salt.
MatthewB yup
I had never thought about that before. The principle of a bubble is that you paid more than the actual value it's worth. ETF is a vehicle and the price you pay for it might not match the actual value of the underlying shares. What happens if the bubble bursts? You still have shares and the ETF would be back to matching the value of the shares. In my poor understanding, it will only affect the fact that you can buy more ETF. Which turns out to be great.
I like your videos so I've got a piece of constructive criticism: look at the camera more! Staring directly into the lens may feel weird, but it looks great on film! Keep up the cool vids!
If it's a passive bubble then why aren't the active investors selling the supposedly overvalued shares? If you're saying there's a "passive" bubble, then you're saying there's stock market bubble in general.