On Wall Street, there is far from agreement on index funds.
In 50 years, index trackers have grown to $ 11 trillion. It should be noted, however, that critics point out that this disrupts stock pricing and increases volatility.
Fifty years after the first fund was launched to track the movements of an entire market, passive investment products are seen by many as irreplaceable. They are reputed to have given masses of small investors inexpensive and high-yield equity savings and to protect them from expensive rip-offs by funds and banks.
In the US alone, the market segment has grown to $ 11 trillion
But some Wall Street rebels do not share the enthusiasm for the funds, on the contrary: In view of the breathtaking size of the segment, they fear nothing less than the entire capitalist social order. “On a social level, this is potentially catastrophic,” says Michael Green, chief strategist at Simplify Asset Management in a talk with Bloomberg. “The crisis is approaching, people have to change something.”
The dark side of passive funds in the eyes of the critics
These direct funds to companies that don’t deserve it. To do this, they distort pricing in the stock markets and increase volatility. “The capital markets aren’t about funding someone’s retirement,” said Green. “It’s about efficiently allocating capital within an economy and creating incentives to invest in better companies,” says Green.
Inigo Fraser Jenkins, head of global quantitative strategy at Sanford C. Bernstein, once stated that passive investing is worse than Marxism. Michael Burry, known from the financial crisis bestseller “The Big Short”, believes passive investing is guilty of a stock bubble. Yves Choueifaty, a Frenchman known for his $ 10 billion “anti-benchmark” strategies, once called it “absolutely toxic.”
Fee and performance advantages of passive funds
Despite these ideological objections, investors relentlessly continue to pour billions into index trackers – and it’s not as if there weren’t any good reasons: one study after another shows that most active fund managers don’t deliver better returns than their benchmarks – after deducting the due fees. Those who do it often don’t make it permanently.
Prominent criticism of the index fund
The simple management and high cost pressures lead to economies of scale that concentrate stock ownership in a handful of giants like BlackRock and Vanguard. One study predicts that within 20 years, the three largest funds will control 40 percent of the companies in the S&P 500.
Stock price distortion through passive investing?
The question of the extent to which the funds distort share prices is even more hotly debated. In a study last year, scientists Xavier Gabaix and Ralph Koijen argued that the dominance of price-insensitive shareholders – which index funds tend to include – means that every single US dollar of inflows can lead to five US dollars higher market values. That is the reason why there have been more massive movements between ghostly periods of rest in recent years. This development also undermines a basic assumption of efficient markets theory, namely that stock prices only reflect the present value of future dividends.
Self-reinforcing mechanism of inefficiency
“For me as a discretionary fund manager, high prices and high valuations are an indication of lower future returns – so I try to find alternatives,” says Green, who once worked in Peter Thiel’s family office. “A fund that is weighted like an index according to the market value does exactly the opposite: it pushes more of the newly incoming money into the highest rated companies, so that a self-reinforcing mechanism arises.”
Opportunities opened up for active managers
This is also suggested by another study from this year, which shows that inflows from passive funds into the S&P 500 have driven the prices of its largest members disproportionately high. Paradoxically, this creates new opportunities for discretionary investors because the smaller values become comparatively too cheap at some point.
Wrong sense of security
Choueifaty says that is precisely why indices give investors a false sense of security. “The benchmark, weighted according to market value, always pushes the money to companies that are already in’ and expensive, ”says the founder of the Tobam fund. “If you invest passively, you are anything but neutral.”
Diversification falls by the wayside with market capitalization-weighted indices
A common argument for index funds is that a few duds won’t do any harm when investing in 500 stocks. But in the S&P 500, the five largest stocks, all of them technology companies, weigh just as much as the 350 smallest. Sectors become dominant when they are most expensive. It’s a disaster for long-term investors, says Choueifaty.
Mechanismus der Märkte verändert
Wenn man die Annahme akzeptiert, dass die Billionen, die in Indizes fließen, einen Einfluss auf die Mechanismen der Märkte haben, wird es einfacher, die jüngsten Verzerrungen am Markt einzuordnen: Der Wahnsinn um Meme-Aktien, die Volatilität während der Pandemie und Technologieunternehmen mit dreistelligen Kurs/Gewinn-Verhältnissen.
Bedrohung für den Kapitalismus durch Indexfonds: bitte warten
Gleichwohl glaubt der Bernstein-Quant Fraser Jenkins nicht, dass die von ihm 2016 vorhergesagte Bedrohung für den Kapitalismus durch Indexfonds schon vor der Tür steht. Nun ist es die steigende Inflation, die Portfolio-Strategien in Frage stellt und im Zweifel eine aktive Antwort verlangt.