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Why Wall Street Isn’t Useful for the Real Economy

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#41 LFC

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Posted 17 March 2020 - 10:46 AM

Remember this?

View PostLFC, on 04 January 2019 - 02:41 PM, said:

Barry Ritholtz responds to an article at MarketWatch entitled Your Love of Index Funds Is Terrible for Our Economy by somebody named Michael Brush. Brush blames index funds for all sorts of evils in the market. Ritholtz is having none of it.

Here are the three claims he takes on. Click the link to read his responses.


“Index funds contribute to market melt-ups and meltdowns”


“Index funds reduce the quality of stock analysis”


“Index funds contribute to poor corporate governance”

Now that we've seen a lightning fast bear market Ritholtz follows up on how the prognostications index fund bashers actually played out. The short answer is not well.


If you’re one of those people — a pundit, investor or active manager — who’s been bracing for passive investing and exchange-traded funds to blow up the stock market, well, there’s some bad news for you.

But first, let’s recall some warnings about passive investing:
  • Index funds are Marxist or communist
  • Or socialist
  • Passive investing is “devouring capitalism”
  • It has reached a “mania”
  • The passive boom is creating “frightening” risk for markets
  • Passive investing is “lobotomized investing”
  • Indexing represents a danger to the economy
  • Your love of index funds is terrible for our economy
  • They are a bubble waiting to burst
  • Passive investing poses a systemic risk
But a funny thing happened on the way to this dangerous, systemic, Marxist bubble:


If ever there was a situation where the critics have told us passive was destined to fail, this should be it: the fastest bear market on record. A market externality caused by the coronavirus pandemic has sent volatility to swing wildly as markets have fallen the most since the financial crisis of 2008-’09. For investors younger than 40, this month probably saw the worst day of their investing lives. The Dow Jones Industrial Average now is about 30% lower than its record high set a little more than four weeks ago.

If ever there was an opportunity for active investing to shine, this is it.

But that’s not what we have seen. The panic is emanating from the great minds on Wall Street, not the plodders on Main Street. Perhaps the most intriguing indicator of this is found in the vehicles that professionals use versus those preferred by individual investors.

Consider the three largest S&P 500 Index funds in the world: State Street’s SPDR S&P 500 ETF Trust or Spyder (SPY), Blackrock’s iShares Core S&P 500 ETF (IVV) and Vanguard’s S&P 500 ETF (VOO). State Street’s Spyder is arguably the choice of professionals; it was the first major index ETF and the most liquid. BlackRock and Vanguard’s offerings are preferred by registered investment advisers and individual investors. Note these all hold the exact same thing; they are simply in different ETF wrappers.

As of last week, when the sell-off began to accelerate, BlackRock and Vanguard customers were net buyers every single day. By the end of the week, State Street’s customers turned into sellers. (We should get updated data on last week from all three fund managers later this week.)

In other words, as the sell-off progressed, Wall Street pros panicked and sold while moms and pops stayed calm and bought. Some of this is attributable to different timelines between investors and traders, or between short-term and long-term. But one can’t help but think that some of this is explained by psychology: The professionals are the ones whose bonuses and perhaps even their jobs are on the line. Retail investors looked to take advantage of a price drop.

But we can guess how this will develop, based on the latest data from Vanguard Group. According to the firm’s most recent measures of money flows, every single day of February and the first week of March 1 all saw a net gain for equities.

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