Should we worry about the growth of indexing? | Summary and Q&A

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June 5, 2023
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The Evidence-Based Investor
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Should we worry about the growth of indexing?

TL;DR

Passive investing is not driving stock market bubbles and there is no evidence that it poses a systemic risk.

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Questions & Answers

Q: Is passive investing contributing to stock market bubbles?

No, passive investing by definition involves whole market investing and does not favor certain stocks over others based on capacity.

Q: Is the growth of indexing connected to equity overvaluation?

No, equity overvaluation is unrelated to passive investors who simply track the whole market. It is a different question altogether.

Q: Are passive investors more likely to panic sell during market downturns?

No, passive investors typically have a long-term investment strategy and are less inclined to time the market or rush for the exits during downturns.

Q: Did the March 2020 market crash reveal any flaws in passive investing?

No, the markets kept functioning amidst the volatility and passive investors did not rush to sell. The system effectively absorbed the capital reallocation by institutional investors.

Summary & Key Takeaways

  • Foreign vesting has become highly popular, but some claim that there is an index investing bubble developing.

  • Passive investing involves whole market investing, and there is no evidence that it is driving stock market bubbles.

  • The growth of ETFs has raised concerns about investors rushing for the exits during market downturns, but this did not happen during the COVID-19 pandemic.

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