Seems like more and more investors are throwing in the towel and just go indexing. I always wonder: 1. What happen and what are the consequences if all investors just index? 2. What is the % when things start to tip over?
1. I believe there might be more traps and wild swings, but if you know how to play options, many more will be trading as Buffet does. 2. That like asking how high is high. But like in the stock market or commodities, when you have an abundance of the masses on one side, doesn't have to go high to be crumbling down, matter of fact, the index will help cause more movements down cause of liquidations. And at some point, investors will be moving out of Indexes as they will become more volatile. Good hedge funds will make huge sums trading outside the Indexes and majority will do down as will those individuals in the Indexes. And of course when it is far too late, the exchanges will step in and slow down the movement when History repeats again that is wrong thing to do, but to show public they are involved, they will put in price or time limits which causes more public concerns for ultimate crash, whereas if left for open movement, crash I suspect would be over faster and never so depth, but pure supercalifragilisticexpialidocious on my part. Let the bickering start.
1. It is almost certain that (literally) "all" investors invest in index funds. However, the more people investing in index funds leads to opportunities to buy the winners and short the losers. 2. Too hard to tell. There's nothing from stopping people from buying SPY and shorting 1 or 2 losers (in appropriate weights) on Monday, even if "only" 5% people are indexing. The number of people indexing doesn't need to be very high to create opportunities. .
I think that the biggest part of stocks are in strong hands. Many companies are controlled by certain people or groups, and to keep the control they have to keep the stocks. They don't care about beating the index.
There will be no market. Buys and sells make a market. If there is no sells, only buys, there won't be a market. How can people buy something if no one sells it?
Let's do a thought experiment: If starting today all new investors only invest in SP500 index, some buy some sell because of individual investors need. The next day there is a net buy, the money all goes into index proportion, so the MM will have to be in proportion short sellers. The SP500 will still go up since supply is less than demand? But since they sell to buyers in the same proportion, so all stocks in the SP500 will have a beta of 1? There are several questions and puzzles: 1. Will the overall market be more volatile or less and why? 2. What can and who will change the proportion? Will business performance still matter? 3. Are the MM now the market instead of just middlemen? Is the market still efficient, or not?
I will try to help and answer but my knowledge is from own research so it could not be accurate. 1. Yes becouse sooner or later the number of imbalances will be more like to happen. 2.Investors itself can change proportion. If MMs win from bids and offers, the more investor will encourage them to be. 3. I would say those are mostly automated. Some middleman act as MMs. Depending what do you understand for efficient. You mean zero sum? Most papers and people and experts say it is. I would say it is not in the same market.
What you are saying is there is an upper limit on the percentage that the market can theoretically become index and so there will always be a market, just that it may be skewed. That makes a lot of sense to me. Thanks.
There are also many traders/investors that think they can beat the index, so they will never follow the index. They think that selected stocks have more potential than the index. This is also the reality, but the trick is to pick the winners and not the losers.
There is a lot of research out there about indexing with ETFs but one specific issue no one has mentioned on this thread yet is corporate governance. With Index ETFs no one actually holds claim to the shares which means a reduction or lack of activism to hold companies responsible. With mutual funds at least the manager has the right to vote the shares they own. Not so with index ETFs. And of course the big one is that volatility has the potential to increase as well as decrease. AKA, heard mentality.