Could index investing become too big?

22 March 2017 | Markets and economy


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Index-fund investing is popular. But can large index funds cause inefficiencies in the market? In this video—an excerpt from a webcast that aired in the United States recently—Vanguard Chairman and Chief Executive Officer Bill McNabb weighs in on this common misconception.

Rebecca Katz (moderator): We have a question from Sean in Wisconsin that is, "Is there any concern about too many people investing in index funds or is indexing becoming too big?" And does that really create problems if we believe in an efficient market theory?

Bill McNabb: Yeah, so, Sean's question actually was probably maybe one of the catalysts. There's been a lot of articles on this which we would describe in a lot of different terms.

Rebecca Katz: You're not allowed to use those, it's a family show.

Bill McNabb: Like the simplest one I can say is most of the arguments are inane and completely unsubstantiated from a data standpoint.

When you think of indexing today, so broaden it beyond mutual funds and look at the whole U.S. market, it's 15% of the U.S. market; it's less than 5% of the global market. Trading volumes are even lower because index funds don't typically trade a lot. And so what you're talking about in terms of price discovery and efficiency in the markets and so forth is still being driven by active management. We have a very long way to go in terms of indexing as a percentage of the market before we should even be having these discussions.

Important information:

Recorded on January 5, 2017.

References in this presentation to "Vanguard" are to our parent company, The Vanguard Group, Inc. Vanguard ETFs® are managed by Vanguard Investments Canada Inc., an indirect wholly-owned subsidiary of The Vanguard Group, Inc.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

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