Here is what Michael Burry who was featured in ‘The Big Short’ has to say on the issue:
https://www.bloomberg.com/amp/news/...plains-why-index-funds-are-like-subprime-cdos
Interesting as he feels the same about index funds as he did the housing bubble.
He did not say he is shorting the market as he did in the housing bubble
Also, he does not say why he thinks there is a bubble.
I think there is no bubble because:
1 Most ETF trading is the buying and selling of an ETF. No additional stocks are bought during these transactions, so the mention of trillions of $ being traded in ETFs is misleadiing
2 There are more active non ETF traders than passive ETFs traders ao active traders will see distorted values caused by ETFs and sell bringing stability to market
3 The majority of stocks in index funds are actively traded not passive so they do not count. IE insurance companies employ traders to seek value stocks in order to beat the average while tracking an index. They seldom beat the average and when they do it is by luck so passive is the way to go
4 Neither of the two greatest market traders in history are alarmed and both recommend ETFs to investors. They are Warren Buffet and John Bogle. The latter created Vanguard funds which created index funds to save investors $. Unlike the all the rest of mutual fund companies, Bogle actually cared about investors above a profit.
It is so difficult to beat the market and predict the winners it seems impossible from where I see the picture
Even Buffet cannot pick a winner. He buys a cross section of value stocks that in aggregate will do well, but he has no idea which ones will be a winner, which is the definition of a quality index
You can do the same with, for example, the S&P 500. By doing so without waver, the unsophisticated investor can beat the savy professionals who are blind to even one weakness. If there is a ETF bubble that bursts stay in. If you happen to have some cash, or can save some, it will be an excellent time to buy, as it was in the housing bubble crash
The caveat is invest monies you may need in the short term in safer investments, that way you will not have to sell when the market declines. You have lost nothing until you sell.
S&P 500 has done so well since 2009 it is statistically highly improbable so expecting future performance at the same level seems foolish
But diversification is the free lunch to decrease volatility but get quality returns and while the S&P companies hold foreign companies that does not mean you get that international exposure
As well, the S&P is large cap and small caps do historically better but are hard to pick so they especially need to be indexed
Valuations are the best predictor of future outcome and the S&P P/E ratio is 20.5 while TSX is 14.6. While valuations can remain high for long times, putting all your monies into the most expensive market does not seem wise.
Remember, the market will flucuate.