Could index investing become too big?
22 March 2017 | Markets and economy
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.
Recorded on January 5, 2017.
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