I have made a lot of money during the last 12 years, mostly with tech stocks. However, I've lost a lot of money allowing myself to be convinced by so-called gurus, declaring that the sky was about to fall in on the stock markets. The lesson I've learned is to focus on what I believe to be good investments and to do completely the opposite of what the noise is saying. I'm invested in global tech, global pharmaceuticals, global small cap, a US 500 index and a UK FTSE 100 dividend fund. Occasionally I affect the weighting of each fund, but that's it.
Hi @RobCLynch my core portfolio is a matter of record, but it is almost all in one global equity fund and I don't deviate from that. My fun portfolio (about 10% of my investments) is where I do the tactical stuff that usually loses money 8-) I don't trust RUclips gurus either! Thanks, Ramin.
@@Pensioncraft Excellent. I have a fun portfolio on T212 which I use to lose money also! I don't try to, but I only allow myself to make mistakes in the 'fun' portfolio lol. But I've done well trading ETFs based on ex dividend dates, throughout the year. Thanks for your input.
Jeremy grantham gave me the jitters in 2022 saying s&p500 would fall to 2000, I still invested heavily but I’m guessing listening to him cost me many $$$ks, oh well lesson learnt!
A general point - people only actually lose money if they bought high and sold low. Looking back and saying "if I'd only bought this then and sold again at this point...", or if you sold early and the price continued to increase is purely hypothetical and does not constitute a realised loss. I'm not saying that you haven't made realised losses but some people paint a bleaker picture than is actually the case.
@@davem.4003 Fair comment. One thing that helps when my USA 500 fund drops by 10% during a correction, yet it's still up by 155% so the psychology flips to not caring about the market noises.
When I was a life assurance underwriter, a long time ago, investment funds normally had a 5% bid/offer spread, as well as high fees compared to today. Things have changed a lot.
Hi @MattMcQueen1 wow that's a big spread! Although not as high as one of my mistakes - JZ Capital Partners where the bid-offer spread (which I didn't check!) is over 20% www.londonstockexchange.com/stock/JZCP/jz-capital-partners-limited/company-page I'll never forgive myself for buying that... Thanks, Ramin.
Hi Ramin, your videos are always excellent but this one is one of the best! Thanks so much for making available all these high quality videos for free.
Sometimes I question how big the difference is between the stock market and any other ponzi scheme encouraging more investors to input money so valuations stay high
Hi @jimbojimbo6873 I think that money in stocks isn't like a Ponzi scheme because ultimately you're providing capital for companies that provide good services for everyone. Thanks, Ramin.
The Ponzi scheme is called the Ponzi scheme because there is no fundamental value of the said scheme - you literally take a new joiner's money to pay for the previous joiner while you pocket the changes.
One of the main catalysts of US stock valuations has to be buybacks. The megacaps are particularly active with this and I expect will declare the same later this week (Q2 earnings). Short-term trading also appears to be an influence with indexes getting pumped by the likes of 0TDE's. There is a lot of greed right now, 2008 is long forgotten but there will no doubt be a canary cheeping before long.
Hi @jasonharding8336 you're right that megacap tech stocks like Apple have been doing a lot of share buybacks and this has pushed up their stock price. 0TDEs will have a temporary impact and could be calls or puts which push prices in opposite directions so I doubt that's a long-term driver of megacaps. Thanks, Ramin.
What about the argument that having large amount of passive investors buying at any price affects price discovery? Asset prices are being pumped up by passive investors only because they're part of the index and not because of their fundamentals.
Hi @MrBatica123 the focus of this video was more about stocks with the highest and bubbliest valutions which is the Megacap tech stocks and why they have grown disproportianately large relative to the rest of the market. Michael Green makes the point that you highlight too and highlights that it becomes a huge problem in risk-off markets where passive outflows indistriminately punish all stocks regardless of fundamentals. Thanks, Ramin.
Good video. Your pt3 active v passive - the problem is (normally) the active funds are more expensive in management fees etc and yet only 20% of these funds beat the market index each year. So for longer term holding you are much better off just tracking the index.
True @14nst3w4rt the S&P Index vs Active reports are pretty clear evidence that active managers fail to beat their index most of the time net of fees. Thanks, Ramin
I never thought much about passive investing effects until recently when Michael Green pointed out that it's share of trading was significant. 2% was not significant. 40% was. To me, that it's share was growing matters. I'm not a pro, and very new to the stock market. Over the last two three years, there was a global event, and before that there was high frequency trading. I think in terms of time frames, the market is now quixotic as compared to macro or technical. I also wonder how one can determine when a passive fund rebalances. Is it stated somewhere? Is there a regulation? Are the terms different between funds? Who determines it? Is the owners of the fund? Thank you addressing the topic of passive investing affecting trading.
If you combine all active managed funds don’t you just get the index albeit with high fee? Also is the S&P for example itself an active managed fund of sorts anyway. To get entry you have to meet certain strict criteria.
The final factor does sound logical. As a natural value investor - isn't buy low, sell high what we supposed to do? - I find this argument a bit depressing. Passive funds are becoming more and more popular so will value ever come back into fashion??
Not with moonshot mentality riding on always push in retirement funds and all the clearing houses having an investing arm and the ability to direct tap the API while our trades get front ended.
Hi @jont96686 it's hard to see passive's popularity ebbing while the performance of active managers remains so poor. But perhaps we'll reach an equilibrium point where passive tops out and then value can make a comeback. Or perhaps passive value funds will become more popular. Thanks, Ramin.
Great video! Would it be fair to go one step further and say that the move to passive funds in UK pensions has dragged liquidity out of UK capital markets and into the US ones in a virtuous (vicious) circle for the US (UK)? What measures could be taken to reverse some of this e.g. mandating a % of UK pensions to be invested in UK assets (and if so would that be on existing funds or new funds only)? Seems like such a move could have a beneficial impact on UK markets in the short and long term (though they might take a bit of adjusting in the medium term).
You also have the sheer number of products going into Mag 7, the number of ETF’s, retail participation etc. it is unambiguously crowded. That works well until it gets too crowded. My own view is that is now
Look at it the other way around ? if there were no Passive funds and all investors private and corporate had to buy individual stocks, the private investors can never be well enough informed to act fully rationally in the market, will be much more susceptible to hype and distort the market that way even more than they do currently ( e.g. I'd argue the Tesla share price would never have reached the highs it did without "fanboy" investors) On hte other hand if most small investors are just buying the market as determined by the better informed corporate actors that distorts the market less - though I'd agree it probably favours large cap over small/mid since private investors are more likely to buy those indexes than whole market or small-mid cap funds.
Hi @carlyndolphin I think the short answer is nobody knows how much of the flow has to be active for price discovery to work efficiently. I think also that price discovery is a misnomer because given the inability of active managers to choose winners suggests that they can't analyse fundamentals as well as might be hoped. There was an interesting article about this from Morningstar www.morningstar.com/markets/how-passive-investing-harms-market-efficiency which says "The empirical research demonstrates that higher passive ownership decreases market liquidity (higher bid-offer spreads), decreases the informativeness of stock prices by increasing the importance of nonfundamental return noise, reduces the contribution of firm-specific information, increases the exposure to stocks of shocks to discount rates, and increases the tail risk of stocks." And the conclusion is "The takeaway for investors, then, is that while the trend toward passive investing has negatively affected the market’s informational efficiency, active management has actually become even more of a loser’s game." So if you can't beat them... Thanks, Ramin
Thanks for this great explainer. At 12:55, is the implication that the active investors with the opposite underweight (as must exist) aren’t traditional mutual funds/ETFs, like hedge funds?
Hi @rezwhap that could be the case. Or it could be retail investors or other large institutional investors such as sovereign wealth funds. Thanks, Ramin.
GMO's paper suggests that it's active retail investors who are overweight growth / underweight value, whereas active institutional managers tend to do the opposite. They concede that the effect is probably quite small, however.
What you say at 1:40 is not 100% of the story. An ETF like SPY has a mandate to mirror the performance of the S&P 500 index, but ETF's are free to trade at whatever price buyers and sellers demand during any trading day. If the price of SPY drifts away from a good representation the S&P index's level, 3rd parties known as "authorized participants" (AP's), typically large financial entities holding shares of SPY outside the ETF called "creation units", buy or sell those shares to bring the price per share of SPY back in line with the index to ensure minimal tracking error.
Hi @Duke-225 that's true it's not the index manager itself that does the buying and selling of stocks as units are created and redeemed it's the APs but the net effect is the same i.e. inflows mean there is buying of stocks in the fund and outflows mean selling of stocks in the fund. Thanks, Ramin.
Before everyone started switching over to passive index ETFs, they invested mostly in individual quality stocks. The amount they invested in each stock in their portfolio was not based on the value of the company. For instance, they might put one tenth of their cash into each of ten quality stocks. However now they have switched to index ETFs and so they are now weighting their investments in exactly the same stocks, albeit inadvertently. I e. There is no randomness
First, one can also compare the companies in the SP500 against the ones that are not. That might give another result. Logically that would mean the smaller companies in the SP500 might be overweight too. Second, Apple for example is part of many ETF's. That might lead to higher pricing of Apple compared to other stocks in the SP500. Third, a bit on the sideline. If ETF's (partly) control the market than the price of a stock (partly) is the result of being part of the ETF and the market maker, not the companies performance. That might lead to over and under valuations. Just some thoughts.
If the S&P index represents the overall market cap and the passive funds are simply a matching proportion of that does that not mean that the non-passive element in total must also be a matching proportion? Yes individual funds will have different proportions but in total does it not have to match what the passive funds hold and also the overall index. I wonder whether the fact that it has become much easier for non US citizens to invest in the US market is a factor in increasing the value of the S&P 500.
Hi @peterbrown1069 some index funds are "sampled" i.e. they don't buy all the stocks in the index, they focus on the largest ones in order to match the index. But for many index funds they buy all the stocks in the index. So the passive component won't match the market cap weightings in aggregate. I think the source of flows from outside the US contributes to the magnitude of the effects compared to, say, twenty years ago when S&P 500 ETFs and global ETFs weren't so large. Thanks, Ramin.
Hi @AlexisMoore-nx6wf 0.125% is the proportion of the outstanding stocks that the index fund would buy i.e. a billion dollars of Broadcom is 0.125% of its outstanding shares and 4.5 billion of Apple is also 0.125% of its outstanding shares. By definition the index fund buys in proportion to the dollar value of the outstanding shares (market capitalisation) of each stock in the index. That means the price impact should be similar because the larger stocks are more liquid. Thanks, Ramin
Another factor to consider is that the S&P500 is probably the goto passive destination. The move then is not only from small and value stocks, but also from other markets eg. Emerging Markets.
I thought the key observation was that liquidity does not scale with market cap as most expect. And so buying 0.1% of a mega cap has a bigger impact than buying 0.1% of a small cap. I know it seems counterintuitive but I thought some recent academic literature showed this.
Hi @VanderlayLux Michael Green refers to the paper by Valentin Haddat et al. "How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing" papers.ssrn.com/sol3/Papers.cfm?abstract_id=3821263 Thanks, Ramin.
I see the index way getting more and more the norm. One big reason being lots of middle class earners are selling up their mortgaged buy to lets as that is finished for years to come and they are looking for other ways to get ahead. This is my experience.
Hi @joshwatts8654 having a buy-to-let and investing via cheap index funds is also possible. It's not either-or. But as you say the passive approach to investing is getting more popular as people realise the additional fees paid to active managers to beat the index underperforms just buying the index more cheaply most of the time. Thanks, Ramin
Hi @Kingfisher62 If you listen to an interview with Michael Green (interviewed by Ben Felix) on this topic the conclusion was that it's best to carry on buying index funds. Thanks, Ramin.
Been thinking on this topic as well too, its very good we are talking about this, this is smth Michael Burry has hinted on that seems like somewhat of a threat if unaddressed.
Hi @MagicNash89 Burry's point was about the smallest companies in the index where there was less liquidity and flows would move the price down by more as people sell index funds. I didn't talk about that in this video but I have done in the past. Thanks, Ramin.
Hey Ramin, Could you look at doing a video on bid offer spreads of ETFs and how liquidity may affect the choice in global index fund choice? For example, not long ago I switched from VWRP to FWRG due to the lower ongoing fee however due to the reduced liquidity of the fund the bid offer spread is much higher for Invesco than the vanguard ETF. If regularly investing then this would outweigh the reduced ongoing fee meaning VWRP returns are better. I haven't seen anyone discuss this, am I understanding incorrectly?
Hi @domobomomiles bid-offer spread on ETFs tends to be pretty small for the larger ones and it's a one-off cost. Compared with ongoing fees that compound the bid-offer spread is less important. But if you stick to large ETFs the same relationship holds as other stocks which is that a larger market capitalisation (net asset value) means a smaller bid-offer spread. Thanks, Ramin.
@@PensioncraftThanks Ramin! I realised that my calculation for the original question was floored and you're right, the bid-offer spread is a lot smaller impact on the amount invested than I was calculating and hence the ongoing charge is more important! Also, your videos are the best out there, keep them coming!
Really great video. Do we have much data on investors' preference for large cap passive funds vs small or mid cap passive funds? Anecdotally, I see A LOT more retail investors investing in S&P500 index funds than in, say, Russell 2000 index funds. Could part of the issue be not simply that passive index funds are replacing active funds, but that the kinds of investors who favour passive index funds often favour large cap passive index funds over small cap, mid cap, or even total market passive index funds? I've been buying into a US small cap fund over the past few years because I see a lot more value there than in the S&P500, but, at least based on my conversations with other retail investors, I think I'm in the minority. Almost everyone I know just seems to buy VOO.
Hi @neilhollands2750 I don't know of any data that's freely available about investor preferenced for large cap passive funds. I think most people want to have a solid core to their investments and a fund that's diversified amongst large caps is felt to be safest. VOO is concentrated in one country so I think that's a risk even though it's the US. A lot of US investors I speak to have a completely US-centric view of equity which is understandable but I think it ignores opportunities elsewhere in the world. Thanks, Ramin.
I think there's a delay on a video's view counter. I think Tom Scott made a video mentioning that the view counter is out of sync but I'm too lazy to go look!
I'd argue that passive funds ensure investment flows into companies that private investors would mostly never buy, if individual investors were forced to buy individual stocks only it would likely lead to way more overvalued "Hype Stocks" and way more undervalued sub megacap stocks.
That's an interesting idea @jabberwockytdi8901 if we look back to the period before ETFs (before 1990) there were periods of concentration e.g. US steel companies, US oil companies, AT&T... but I don't know of a study that shows that hugely market-cap dominant megacaps naturally appear even without index funds. Thanks, Ramin.
Frankly, one of the reasons this topic is just becoming more "talked about" is the pandemic, crypto, and self-proclaimed financial guru on TikTok is making investments more like gambling in Vegas these days.
True @dingzhuxi although retail investors still make up a smaller percentage of the overall market volume and ownership than institutional investors. And all I'd say about financial TikTok gurus is that time is the best differentiator between good and bad gurus. The good ones go the distance and their bad advice in the form of questionable stock tips and false promises of a quick buck will eventually destroy their credibility. Thanks, Ramin.
Not too sure I accept any of these arguments fully, my own take is that the market is driven by money flowing in and out so if the generation of private investors are making historically larger inputs into the market then that might be the reason but wether this is individual or index stocks I haven't the info though the stock market has been traditionally driven by institutional investors sovereign wealth funds etc again hard to say without access to the historical data. Cheers Ramin good talk.
Hi @anthonybrown4874 as you say it's hard to know which argument carries the most weight and I suspect the megacap concentration is due to many factors. Thanks, Ramin.
Too many financial gurus on youtube who don't have a clue and make videos because it's easy money and there are too many gullible sheep out there. Not talking about you Ramin. But youtube needs to clean its house
Hi @andysutton9780 I'm afraid I'm not better than that 8-) But seriously, I think this title sums up the content of the video. Also I think that passive can cause market distortions now that it's so large. Thanks, Ramin.
I have made a lot of money during the last 12 years, mostly with tech stocks. However, I've lost a lot of money allowing myself to be convinced by so-called gurus, declaring that the sky was about to fall in on the stock markets. The lesson I've learned is to focus on what I believe to be good investments and to do completely the opposite of what the noise is saying. I'm invested in global tech, global pharmaceuticals, global small cap, a US 500 index and a UK FTSE 100 dividend fund. Occasionally I affect the weighting of each fund, but that's it.
Hi @RobCLynch my core portfolio is a matter of record, but it is almost all in one global equity fund and I don't deviate from that. My fun portfolio (about 10% of my investments) is where I do the tactical stuff that usually loses money 8-) I don't trust RUclips gurus either! Thanks, Ramin.
@@Pensioncraft Excellent. I have a fun portfolio on T212 which I use to lose money also! I don't try to, but I only allow myself to make mistakes in the 'fun' portfolio lol. But I've done well trading ETFs based on ex dividend dates, throughout the year. Thanks for your input.
Jeremy grantham gave me the jitters in 2022 saying s&p500 would fall to 2000, I still invested heavily but I’m guessing listening to him cost me many $$$ks, oh well lesson learnt!
A general point - people only actually lose money if they bought high and sold low. Looking back and saying "if I'd only bought this then and sold again at this point...", or if you sold early and the price continued to increase is purely hypothetical and does not constitute a realised loss. I'm not saying that you haven't made realised losses but some people paint a bleaker picture than is actually the case.
@@davem.4003 Fair comment. One thing that helps when my USA 500 fund drops by 10% during a correction, yet it's still up by 155% so the psychology flips to not caring about the market noises.
When I was a life assurance underwriter, a long time ago, investment funds normally had a 5% bid/offer spread, as well as high fees compared to today. Things have changed a lot.
Hi @MattMcQueen1 wow that's a big spread! Although not as high as one of my mistakes - JZ Capital Partners where the bid-offer spread (which I didn't check!) is over 20% www.londonstockexchange.com/stock/JZCP/jz-capital-partners-limited/company-page I'll never forgive myself for buying that... Thanks, Ramin.
Hi Ramin, your videos are always excellent but this one is one of the best! Thanks so much for making available all these high quality videos for free.
Hi @blhlow4904 that's very kind of you - thanks! Ramin.
This is one of the best videos from Ramin. Especially the last part. Great explaination.
Glad it was helpful @SameerKhan-gv8mt
Sometimes I question how big the difference is between the stock market and any other ponzi scheme encouraging more investors to input money so valuations stay high
Hi @jimbojimbo6873 I think that money in stocks isn't like a Ponzi scheme because ultimately you're providing capital for companies that provide good services for everyone. Thanks, Ramin.
The Ponzi scheme is called the Ponzi scheme because there is no fundamental value of the said scheme - you literally take a new joiner's money to pay for the previous joiner while you pocket the changes.
One of the main catalysts of US stock valuations has to be buybacks. The megacaps are particularly active with this and I expect will declare the same later this week (Q2 earnings).
Short-term trading also appears to be an influence with indexes getting pumped by the likes of 0TDE's. There is a lot of greed right now, 2008 is long forgotten but there will no doubt be a canary cheeping before long.
Hi @jasonharding8336 you're right that megacap tech stocks like Apple have been doing a lot of share buybacks and this has pushed up their stock price. 0TDEs will have a temporary impact and could be calls or puts which push prices in opposite directions so I doubt that's a long-term driver of megacaps. Thanks, Ramin.
As always Ramin, thanks for making!
My pleasure @andymeek
What about the argument that having large amount of passive investors buying at any price affects price discovery? Asset prices are being pumped up by passive investors only because they're part of the index and not because of their fundamentals.
Hi @MrBatica123 the focus of this video was more about stocks with the highest and bubbliest valutions which is the Megacap tech stocks and why they have grown disproportianately large relative to the rest of the market. Michael Green makes the point that you highlight too and highlights that it becomes a huge problem in risk-off markets where passive outflows indistriminately punish all stocks regardless of fundamentals. Thanks, Ramin.
Good video. Your pt3 active v passive - the problem is (normally) the active funds are more expensive in management fees etc and yet only 20% of these funds beat the market index each year. So for longer term holding you are much better off just tracking the index.
True @14nst3w4rt the S&P Index vs Active reports are pretty clear evidence that active managers fail to beat their index most of the time net of fees. Thanks, Ramin
Thank You.
You're welcome @DPTrainor1 Thanks, Ramin.
I never thought much about passive investing effects until recently when Michael Green pointed out that it's share of trading was significant. 2% was not significant. 40% was. To me, that it's share was growing matters. I'm not a pro, and very new to the stock market. Over the last two three years, there was a global event, and before that there was high frequency trading. I think in terms of time frames, the market is now quixotic as compared to macro or technical. I also wonder how one can determine when a passive fund rebalances. Is it stated somewhere? Is there a regulation? Are the terms different between funds? Who determines it? Is the owners of the fund? Thank you addressing the topic of passive investing affecting trading.
If you combine all active managed funds don’t you just get the index albeit with high fee? Also is the S&P for example itself an active managed fund of sorts anyway. To get entry you have to meet certain strict criteria.
The final factor does sound logical. As a natural value investor - isn't buy low, sell high what we supposed to do? - I find this argument a bit depressing. Passive funds are becoming more and more popular so will value ever come back into fashion??
Not with moonshot mentality riding on always push in retirement funds and all the clearing houses having an investing arm and the ability to direct tap the API while our trades get front ended.
Hi @jont96686 it's hard to see passive's popularity ebbing while the performance of active managers remains so poor. But perhaps we'll reach an equilibrium point where passive tops out and then value can make a comeback. Or perhaps passive value funds will become more popular. Thanks, Ramin.
Quantifying the size of the effect would be useful. I imagine that this is not easy.
Price is what you pay value is what you get. Buffet, and probably Graham and Dodd (his mentors) before him. Place your bets accordingly.
Great video! Would it be fair to go one step further and say that the move to passive funds in UK pensions has dragged liquidity out of UK capital markets and into the US ones in a virtuous (vicious) circle for the US (UK)? What measures could be taken to reverse some of this e.g. mandating a % of UK pensions to be invested in UK assets (and if so would that be on existing funds or new funds only)? Seems like such a move could have a beneficial impact on UK markets in the short and long term (though they might take a bit of adjusting in the medium term).
Why might going under the 0% mark on the last point suggest an overweighting of the name?
You also have the sheer number of products going into Mag 7, the number of ETF’s, retail participation etc. it is unambiguously crowded. That works well until it gets too crowded. My own view is that is now
Great video but what happens if 95% of people invest in index funds? Can the market still function efficiently?
Look at it the other way around ? if there were no Passive funds and all investors private and corporate had to buy individual stocks, the private investors can never be well enough informed to act fully rationally in the market, will be much more susceptible to hype and distort the market that way even more than they do currently ( e.g. I'd argue the Tesla share price would never have reached the highs it did without "fanboy" investors) On hte other hand if most small investors are just buying the market as determined by the better informed corporate actors that distorts the market less - though I'd agree it probably favours large cap over small/mid since private investors are more likely to buy those indexes than whole market or small-mid cap funds.
Hi @carlyndolphin I think the short answer is nobody knows how much of the flow has to be active for price discovery to work efficiently. I think also that price discovery is a misnomer because given the inability of active managers to choose winners suggests that they can't analyse fundamentals as well as might be hoped. There was an interesting article about this from Morningstar www.morningstar.com/markets/how-passive-investing-harms-market-efficiency which says "The empirical research demonstrates that higher passive ownership decreases market liquidity (higher bid-offer spreads), decreases the informativeness of stock prices by increasing the importance of nonfundamental return noise, reduces the contribution of firm-specific information, increases the exposure to stocks of shocks to discount rates, and increases the tail risk of stocks." And the conclusion is "The takeaway for investors, then, is that while the trend toward passive investing has negatively affected the market’s informational efficiency, active management has actually become even more of a loser’s game." So if you can't beat them... Thanks, Ramin
Thanks for this great explainer. At 12:55, is the implication that the active investors with the opposite underweight (as must exist) aren’t traditional mutual funds/ETFs, like hedge funds?
Hi @rezwhap that could be the case. Or it could be retail investors or other large institutional investors such as sovereign wealth funds. Thanks, Ramin.
GMO's paper suggests that it's active retail investors who are overweight growth / underweight value, whereas active institutional managers tend to do the opposite. They concede that the effect is probably quite small, however.
What you say at 1:40 is not 100% of the story. An ETF like SPY has a mandate to mirror the performance of the S&P 500 index, but ETF's are free to trade at whatever price buyers and sellers demand during any trading day. If the price of SPY drifts away from a good representation the S&P index's level, 3rd parties known as "authorized participants" (AP's), typically large financial entities holding shares of SPY outside the ETF called "creation units", buy or sell those shares to bring the price per share of SPY back in line with the index to ensure minimal tracking error.
Hi @Duke-225 that's true it's not the index manager itself that does the buying and selling of stocks as units are created and redeemed it's the APs but the net effect is the same i.e. inflows mean there is buying of stocks in the fund and outflows mean selling of stocks in the fund. Thanks, Ramin.
Before i watch this video Ramin, I demand assurances that Teddy WILL make an appearance!
I find Teddy comforting , he does not care about his portfolio.
Before everyone started switching over to passive index ETFs, they invested mostly in individual quality stocks. The amount they invested in each stock in their portfolio was not based on the value of the company. For instance, they might put one tenth of their cash into each of ten quality stocks. However now they have switched to index ETFs and so they are now weighting their investments in exactly the same stocks, albeit inadvertently. I e. There is no randomness
Great video, thanks! About Saxo, can you buy american ETFs, for example SPY, if you are EU citizen?
Hi @stomanow you can try out a Saxo demo account which will allow you to search for US ETFs like SPY to see if that's possible. Thanks, Ramin
First, one can also compare the companies in the SP500 against the ones that are not. That might give another result. Logically that would mean the smaller companies in the SP500 might be overweight too. Second, Apple for example is part of many ETF's. That might lead to higher pricing of Apple compared to other stocks in the SP500. Third, a bit on the sideline. If ETF's (partly) control the market than the price of a stock (partly) is the result of being part of the ETF and the market maker, not the companies performance. That might lead to over and under valuations. Just some thoughts.
If the S&P index represents the overall market cap and the passive funds are simply a matching proportion of that does that not mean that the non-passive element in total must also be a matching proportion? Yes individual funds will have different proportions but in total does it not have to match what the passive funds hold and also the overall index. I wonder whether the fact that it has become much easier for non US citizens to invest in the US market is a factor in increasing the value of the S&P 500.
Hi @peterbrown1069 some index funds are "sampled" i.e. they don't buy all the stocks in the index, they focus on the largest ones in order to match the index. But for many index funds they buy all the stocks in the index. So the passive component won't match the market cap weightings in aggregate. I think the source of flows from outside the US contributes to the magnitude of the effects compared to, say, twenty years ago when S&P 500 ETFs and global ETFs weren't so large. Thanks, Ramin.
Trackers are basically growth/momentum funds, so the last explanation is definitely the closest to the truth.
Hi. 3:25 Can anyone please explain the “0.125% of market cap”? I don’t know why they aren’t different percentages based on their weighting.
Hi @AlexisMoore-nx6wf 0.125% is the proportion of the outstanding stocks that the index fund would buy i.e. a billion dollars of Broadcom is 0.125% of its outstanding shares and 4.5 billion of Apple is also 0.125% of its outstanding shares. By definition the index fund buys in proportion to the dollar value of the outstanding shares (market capitalisation) of each stock in the index. That means the price impact should be similar because the larger stocks are more liquid. Thanks, Ramin
Understood, thanks Ramin. 0.125% of Apple’s $3.6T market cap is $4.5B
Another factor to consider is that the S&P500 is probably the goto passive destination. The move then is not only from small and value stocks, but also from other markets eg. Emerging Markets.
This one was deep for sure!
I thought the key observation was that liquidity does not scale with market cap as most expect. And so buying 0.1% of a mega cap has a bigger impact than buying 0.1% of a small cap. I know it seems counterintuitive but I thought some recent academic literature showed this.
Hi @VanderlayLux Michael Green refers to the paper by Valentin Haddat et al. "How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing" papers.ssrn.com/sol3/Papers.cfm?abstract_id=3821263 Thanks, Ramin.
I see the index way getting more and more the norm. One big reason being lots of middle class earners are selling up their mortgaged buy to lets as that is finished for years to come and they are looking for other ways to get ahead. This is my experience.
Hi @joshwatts8654 having a buy-to-let and investing via cheap index funds is also possible. It's not either-or. But as you say the passive approach to investing is getting more popular as people realise the additional fees paid to active managers to beat the index underperforms just buying the index more cheaply most of the time. Thanks, Ramin
Yes. I have been saying this for years. The whole worlds pensions are boasting these month after month regardless of market sentiment.
Question is, how do you invest if this theory is correct ?
Hi @Kingfisher62 If you listen to an interview with Michael Green (interviewed by Ben Felix) on this topic the conclusion was that it's best to carry on buying index funds. Thanks, Ramin.
@@Pensioncraftthank you’
Been thinking on this topic as well too, its very good we are talking about this, this is smth Michael Burry has hinted on that seems like somewhat of a threat if unaddressed.
Hi @MagicNash89 Burry's point was about the smallest companies in the index where there was less liquidity and flows would move the price down by more as people sell index funds. I didn't talk about that in this video but I have done in the past. Thanks, Ramin.
Hey Ramin,
Could you look at doing a video on bid offer spreads of ETFs and how liquidity may affect the choice in global index fund choice?
For example, not long ago I switched from VWRP to FWRG due to the lower ongoing fee however due to the reduced liquidity of the fund the bid offer spread is much higher for Invesco than the vanguard ETF. If regularly investing then this would outweigh the reduced ongoing fee meaning VWRP returns are better.
I haven't seen anyone discuss this, am I understanding incorrectly?
Hi @domobomomiles bid-offer spread on ETFs tends to be pretty small for the larger ones and it's a one-off cost. Compared with ongoing fees that compound the bid-offer spread is less important. But if you stick to large ETFs the same relationship holds as other stocks which is that a larger market capitalisation (net asset value) means a smaller bid-offer spread. Thanks, Ramin.
@@PensioncraftThanks Ramin! I realised that my calculation for the original question was floored and you're right, the bid-offer spread is a lot smaller impact on the amount invested than I was calculating and hence the ongoing charge is more important! Also, your videos are the best out there, keep them coming!
Really great video. Do we have much data on investors' preference for large cap passive funds vs small or mid cap passive funds? Anecdotally, I see A LOT more retail investors investing in S&P500 index funds than in, say, Russell 2000 index funds. Could part of the issue be not simply that passive index funds are replacing active funds, but that the kinds of investors who favour passive index funds often favour large cap passive index funds over small cap, mid cap, or even total market passive index funds? I've been buying into a US small cap fund over the past few years because I see a lot more value there than in the S&P500, but, at least based on my conversations with other retail investors, I think I'm in the minority. Almost everyone I know just seems to buy VOO.
Hi @neilhollands2750 I don't know of any data that's freely available about investor preferenced for large cap passive funds. I think most people want to have a solid core to their investments and a fund that's diversified amongst large caps is felt to be safest. VOO is concentrated in one country so I think that's a risk even though it's the US. A lot of US investors I speak to have a completely US-centric view of equity which is understandable but I think it ignores opportunities elsewhere in the world. Thanks, Ramin.
Awesome.
4 views and everyone has given it a thumbs up like. Gotta be doing something right there.
Not complaining, but perhaps it's goodwill from previous videos @davideyres955? Thanks, Ramin
I think there's a delay on a video's view counter. I think Tom Scott made a video mentioning that the view counter is out of sync but I'm too lazy to go look!
Yes I tend to hit like on these type of videos, way before I finish them in full.
I'd argue that passive funds ensure investment flows into companies that private investors would mostly never buy, if individual investors were forced to buy individual stocks only it would likely lead to way more overvalued "Hype Stocks" and way more undervalued sub megacap stocks.
That's an interesting idea @jabberwockytdi8901 if we look back to the period before ETFs (before 1990) there were periods of concentration e.g. US steel companies, US oil companies, AT&T... but I don't know of a study that shows that hugely market-cap dominant megacaps naturally appear even without index funds. Thanks, Ramin.
Frankly, one of the reasons this topic is just becoming more "talked about" is the pandemic, crypto, and self-proclaimed financial guru on TikTok is making investments more like gambling in Vegas these days.
True @dingzhuxi although retail investors still make up a smaller percentage of the overall market volume and ownership than institutional investors. And all I'd say about financial TikTok gurus is that time is the best differentiator between good and bad gurus. The good ones go the distance and their bad advice in the form of questionable stock tips and false promises of a quick buck will eventually destroy their credibility. Thanks, Ramin.
If everyone buy passive index funds,, there's no marked at all, because there's no price setting anymore, or a very wrong price setting of stocks.
I think Index funds have really taken valué out....
Isn't Saxo Danish?
Not too sure I accept any of these arguments fully, my own take is that the market is driven by money flowing in and out so if the generation of private investors are making historically larger inputs into the market then that might be the reason but wether this is individual or index stocks I haven't the info though the stock market has been traditionally driven by institutional investors sovereign wealth funds etc again hard to say without access to the historical data.
Cheers Ramin good talk.
Hi @anthonybrown4874 as you say it's hard to know which argument carries the most weight and I suspect the megacap concentration is due to many factors. Thanks, Ramin.
Too many financial gurus on youtube who don't have a clue and make videos because it's easy money and there are too many gullible sheep out there. Not talking about you Ramin. But youtube needs to clean its house
Hi @ironsoul2633 baaaaaa... 8-) Thanks, Ramin.
Stop with the click bait titles, your better than that.
Hi @andysutton9780 I'm afraid I'm not better than that 8-) But seriously, I think this title sums up the content of the video. Also I think that passive can cause market distortions now that it's so large. Thanks, Ramin.
Firstly, it's *you're
Secondly, don't hate the player dude... That's the way YT works if you want more CTR, Which obviously you do.
@@HiddenLemur Do you know how cringe that is when somebody corrects that particular grammar mistake? obviously not.
Is Cathie Wood 's fund passive? Or more like actively losing money? Sorry actively harvesting taxes
Hi @CristianHernandez-er4zn actively losing money - love it! Ramin.
Saxo? Like the salt?
Lol yeah 😂
At £3 a trade no thanks
Saxo is very expensive