Could index investing become too big?

06 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 CEO 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 (Vanguard chief executive officer): 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 US market, it's 15% of the US 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:

This video is directed at professional investors and should not be distributed to, or relied upon by retail investors.

This video is designed for use by, and is directed only at persons resident in the UK.
This video was produced by The Vanguard Group, Inc. It is for educational purposes only.
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
The opinions expressed in this video are those of individual speakers and may not be representative of The Vanguard Group, Inc.
Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
Issued by Vanguard Asset Management, Ltd, which is authorised and regulated in the UK by the Financial Conduct Authority.



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