Index Funds Are The New Kings Of Wall Street

Ted

FYI: Money managers that mimic the stock market just became the new titans of the fund-management world.

Funds that track broad U.S. equity indexes hit $4.27 trillion in assets as of Aug. 31, according to research firm Morningstar Inc., giving them more money than stock-picking rivals for the first-ever monthly reporting period. Funds that try to beat the market had $4.25 trillion as of that date.

The passing of the asset crown is the latest chapter in one of the most dramatic transformations in the history of financial markets. In the past decade, nearly $1.36 trillion in net flows were added to U.S. equity mutual funds and exchange-traded funds that mimic market indexes while some $1.32 trillion fled higher-costing actively managed counterparts.
Regards,
Ted
https://www.wsj.com/articles/index-funds-are-the-new-kings-of-wall-street-11568799004?mod=md_mf_news

LewisBraham

All hail our robot kings!

Old_Joe

So what happens when almost everybody buys the index and the index winds up tracking the 17 or so "people" who still are buying the individual stocks?

Simon

Old_Joe said:

So what happens when almost everybody buys the index and the index winds up tracking the 17 or so "people" who still are buying the individual stocks?

I use it as a contrarian indicator to increase my weighting in actively managed funds. In fact, I have no index funds at all now in my portfolio.

MikeM

@Simon, how does using indexes as a contrarian indicator work? If most managed funds mimic or can't beat an index, why is that a buy signal for managed funds?

prinx

Index funds are a great way to have a portfolio which lends to effective asset allocation and rebalancing. Even better use ETF's and not mutual funds for easy trading and better tax efficiency to some extent in the above type of portfolio.

Simon

MikeM said:

@Simon, how does using indexes as a contrarian indicator work? If most managed funds mimic or can't beat an index, why is that a buy signal for managed funds?

Now that passive stock fund assets have exceeded active for first time it is anecdotal evidence you should be moving money away from the herd into active managers who can beat the index. There are thousands of funds which have beaten the index over multiple time frames. As an investor of 40+ years this concept seems totally logical to me.

Jeff Saut writes a good, if long winded, article about this.

https://www.advisorperspectives.com/commentaries/2019/09/09/zebras

LewisBraham

@Simon

There are thousands of funds which have beaten the index over multiple time frames.

I seriously doubt that. There are often hundreds, perhaps thousands, over a specific time period, but rarely over multiple time periods. The fund that beats the benchmark over the past five years is rarely the same one that beats it over the next five. The lack of consistency is extremely problematic for the average investor and the end result is the inexperienced chase performance in active management and are punished for it.

MikeM

Still don't get the connection @Simon, where a direction in an equity index could give a contrarian signal to buy or sell managed equity funds. Quite frankly, I only see the 2 moving in the same direction. Maybe at different slopes but certainly up or down together.