Could index funds be a bubble?

[Christaaay]

I've been contemplating the vast migration towards passively managed funds as I get ready to do the same but wonder if there is the potential for a bubble or at least that moving money there right now is not a great idea with the high performance of late.

Came across this article tonight so I thought I'd get thoughts from the group...

http://www.latimes.com/business/la-fi-investing-quarterly-index-funds-20170409-story.html

[2Cent]

I'm pretty sure that there will always be enough people trying to beat the market to compensate for the index funds. Especially if they turn out to be less efficient due to their size affecting the market.

I think it may actually be better if a larger percentage of stockholders is investing for long term gain.

[Dub_the_Builder]

Was this article paid for with 12-b1 fees from actively managed funds?

It's meant to strike fear in people taking the DIY approach and send them running to "professionals". I made a mistake a few years ago to start up a few accounts with an actively managed fund group. After a few months, I realized my adviser couldn't answer basic questions regarding bench-marking and performance.

Yes, at some point there will be a down turn. I hope the education I have given myself will mean I can survive my own internal demons. Nothing is guaranteed.

Also, as far as the passive approach making the market less efficient, I remember looking at an analysis of the Great Recession where S&P ratings were purposely shown favorably even though there was underlying risk. This is real market manipulation.

In our consumerist economy, people are looked at as wells to drain dry. You must decide who is there to support you and who is there to consume everything you have.

[sol]

Index funds, by definition, cannot be a bubble relative to other stocks.  Stocks as a whole can be in a bubble, though that is rarely actionable information.  What are you going to do, not buy any stocks at all?

Some indices track subsets of the whole market.  A BRIC index can bubble, for example, or an REIT index.  Or a commodity index.  These aren't really index funds, though, they're sector funds that have borrowed the name for marketing purposes while "index fund" is a popular term customers like,  like "gluten free" or "free range organic" or "drain the swamp".

The larger question is whether the US total stock market, or the global total stock market, can bubble.  Sure.  Even these are still "sector funds" when compared to total planetary asset valuations, which are mostly unproductive real estate and short term debt.  But now were talking about the collapse of capitalism, not some temporary market blip, and that's not something I really worry about.

[aspiringnomad]

Index funds, by definition, cannot be a bubble relative to other stocks.  Stocks as a whole can be in a bubble, though that is rarely actionable information.  What are you going to do, not buy any stocks at all?

Some indices track subsets of the whole market.  A BRIC index can bubble, for example, or an REIT index.  Or a commodity index.  These aren't really index funds, though, they're sector funds that have borrowed the name for marketing purposes while "index fund" is a popular term customers like,  like "gluten free" or "free range organic" or "drain the swamp".

The larger question is whether the US total stock market, or the global total stock market, can bubble.  Sure.  Even these are still "sector funds" when compared to total planetary asset valuations, which are mostly unproductive real estate and short term debt.  But now were talking about the collapse of capitalism, not some temporary market blip, and that's not something I really worry about.

I agree with sol on the larger point here, but a small (pedantic) quibble with what he wrote: the examples he provided are appropriately termed index funds as that term does not necessarily connote a broad market index, such the S&P or DJIA - those are just the most widely referenced indices in the US. Asset indices have existed to track the performance of a subset of assets for far longer than index funds have been widely traded, so "index" is definitely not a borrowed term for marketing purposes, but a technical term for a mathematical tool. Sector-specific index funds refer to a portion of the economy, such as technology or healthcare. And one specific to the BRIC countries' economies would probably be considered a multi-country index fund, not a sector index fund.