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One Pro Explains Why The ‘Indexing Will Kill Us All’ Crowd Is Wrong

[Editor’s note: As many readers are likely aware, fan-favorite Kevin Muir – formerly head of equity derivatives at RBC Dominion and better known for his exploits as “The Macro Tourist” –  this year transitioned his daily letter to a subscriber-only format. On Monday, I asked permission to republish one of his latest missives, which he granted on a one-off basis. The following is available exclusively to his subscribers and mine.] Tell me the last podcast or research report that really turned your crank. You know, something that made you instantly send it to your trading pals with a big CHECK OUT THE ATTACHED message. My bet? It was a bear argument. Or if it wasn’t a bear argument, it was something that will benefit when the world goes off the rails (i.e., gold). Now you might tell yourself that this is the result of the unique circumstances we are in, but I have news for you - our brains are hardwired to find these arguments more attractive. If it wasn’t COVID, it was the Great Financial Crisis. If it wasn’t the GFC, it was the DotCom bubble. If it wasn’t that bubble, it was the 1987 equity crash. There is always some great disaster lurking around every cor
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5 comments on “One Pro Explains Why The ‘Indexing Will Kill Us All’ Crowd Is Wrong

  1. Sheldan says:

    Excellent analysis and conclusions.

    It doesn’t matter whether markets are “right” or “wrong.” They simply are what they are. No need to justify how they go, or “should” behave – we merely need to recognize what’s going on, learn from our mistakes and try to respond with good sense tomorrow.

    As Mr Muir says, the market’s character will change over time.

  2. joesailboat says:

    Brilliant rebuttal. People who simply stayed put in SPY don”t have much to complain about. Pretty simple.

  3. Mr. Lucky says:

    That concentration chart dating back to the late 1960s was interesting. I may be overstating the case but those days were early in the rise of open end mutual funds. They were “load” funds sold by highly compensated salesmen, generally employed by the fund. To cover the big loads, the funds had to have something really good for the salesmen to sell so they all had to invest in the biggest and best hot stocks. Since they all bought essentially the same stuff there was a good deal of concentration. Oh look, same as today, just a slightly different reason. Pretty soon, late seventies or so, load funds gave way to the no-load Vanguards of the world, with indexed investments and low fees. They could go where the market took them and when they got large they were in the whole market, like it or not and the market now is FAANG or whatever.

  4. bryanb says:

    Thanks for a really good “rebuttal” and a great new perspective for me – including the bear porn. Contrary to instructions, I did Google it.

  5. Major Fomo says:

    “Should you assume that trend will continue forever until it creates the ultimate nightmare scenario?”
    I love that. Arguments against index funds usually include an impossible hypothetical of 100% indexers. The tradeoff between active and passive is itself subject to efficient market forces, and it will self-correct as needed before reaching such absurd proportions.

    I also don’t understand why the focus is typically on the mega-caps. Most indexes are cap-weighted, so when the fund needs to spend its fresh inflows, it would theoretically bid up each stock an equal percentage, right? If anything, wouldn’t it be more natural to fret about market impact/footprint when trading unloved and illiquid small-cap stocks and not the mega-cap stocks, which have deep and liquid markets capable of absorbing the inflows?

    Perhaps price-insensitive index funds stand by ready to enable overvaluations in equities, but as long as they are price takers and market-cap neutral, I still can’t figure out how they could be the ultimate drivers of market distortions.

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