5/14/2017 WTFChartOfTheDay:ThereAreNowMoreIndexesThanStocks

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Home>WTFChartOfTheDay:ThereAreNowMoreIndexesThanStocks

WTFChartOfTheDay:ThereAreNowMore
IndexesThanStocks
ByTylerDurden
Created05/12/201720:30

[1]
byTylerDurden[1]
May12,20178:30PM

[2] [3]

Forthefirsttimeever,thenumberofmarketindexesnowexceedsthenumberofU.S.stocks...

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AsBloombergreports[5] ,traditionalonessuchastheS&P500arecollectionsofsecuritiesweighted
bymarketvalue,andindexfundsmimicthemasalowcostwaytodeliverthemarkets
performance.Manynewindexesaredifferent:Theyincludestocksbasedoncustomcriteria,
suchashavinglowvolatilityorhighdividends.Therecentexplosioninindexeshasbeendriven
bydemandasmanynewbenchmarksessentiallyrepackageactiveinvestmentstrategies
intoindexes,saysEricBalchunas,seniorexchangetradedfundanalystatBloombergIntelligence.

http://www.zerohedge.com/print/595856 1/2
5/14/2017 WTFChartOfTheDay:ThereAreNowMoreIndexesThanStocks

TheycanthenbetrackedbysocalledsmartbetaETFs,whichfundcompaniesarerollingout
rapidly.Moneymanagersareunderpressuretocutcosts,saysBalchunas,asinvestorsshifttheir
moneyintofundswithlowfees.SmartbetaETFsaregenerallymoreexpensivethanS&P500
fundsbutcheaperthanactivelymanagedfunds.Itremainstobeseenhowwellthenew
fundswillperform.

Aswewrotepreviously,[6] fornow,thedebateabouttheimpactofETFsrages,andwilldoso
inconclusivelyaslongastrillionsincentralbankliquiditypropupbroaderriskassetsand
equitymarkets.Itisonlyoncecentralbankstakestartsoakingupsome$18trillioninexcess
liquiditythatthetrueimpactofETFswillbevisible.Untilthen,weleavereaderswiththoughtsfrom
arecentnotebyJPM'sNikolaosPanigirtzoglou[6] ,firstreportedherelastOctober,andsummarized
below[7] ,onwhatthetakeoverbyETFsreallymeans:

Marketsbecomemorebrittle,risky:"Theshifttowardspassivefundshasthepotentialto
concentrateinvestmentstoafewlargeproducts.Thisconcentrationpotentiallyincreases
systemicriskmakingmarketsmoresusceptibletotheflowsofafewlargepassiveproducts."
Passiveorindexinvestingfavourslargecapsasmostequityindicesaremarketcap
weighted."Thiscouldexacerbatetheflowintolargecompaniesbeyondtowhatisjustifiedby
fundamentals,creatingpotentialmisallocationofcapitalawayfromsmallercompanies.Tothe
extentthatthesepassivefundsbecomeevenmoredominantinthefuture,theriskofbubbles
beingformedinlargecompanies,atthesametimecrowdingoutinvestmentsfromsmaller
firms,wouldsignificantlyincrease."
Theproliferationofindexfundsincreasesthesizeofstockinclusionflows.Inturn,
marketmovesaroundindexconstituentchangesbecomemorepronouncedoverpenalizing
companiesleavingtheindexandcausingexcessivegainstocompaniesenteringtheindex.
Crashes,whentheyhappen,willbebiggerandbadder:"theshifttowardspassivefunds
tendstointensifyfollowingperiodsofstrongmarketperformanceasactivemanagers
underperforminsuchperiodsofstrongmarketperformance.Inturn,thisshiftexacerbatesthe
marketuptrendcreatingmoreprotractedperiodsoflowvolatilityandmomentum.When
marketseventuallyreverse,thecorrectionbecomesdeeperandvolatilityrisesasmoneyflows
awayfrompassivefundsbacktowardsactivemanagerswhotendtooutperforminperiodsof
weakmarketperformance."
Marketsbecomelessefficient:"ifpassiveinvestingbecomestoobig,potentiallycrowding
outskilledactivemanagersalso,marketefficiencywouldstartdeclining.Inturn,thiswould
presentopportunitiesforactivemanagerstoextractarbitrageprofits."

Activemanagement Business CentralBanks Economy EquityMarkets Exchange

tradedfund Finance Financialservices Funds Indexfund Investment Investment
fund Mathematicalfinance Money S&P500 Stockmarketindex Volatility

SourceURL:http://www.zerohedge.com/news/20170512/wtfchartdaytherearenowmoreindexesstocks

Links:
[1]http://www.zerohedge.com/users/tylerdurden
[2]http://www.zerohedge.com/printmail/595856
[3]http://www.zerohedge.com/print/595856
[4]http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/05/10/20170512_WTF.jpg
[5]https://www.bloomberg.com/news/articles/20170512/therearenowmoreindexesthanstocks
[6]http://www.zerohedge.com/news/20170427/etfsareweaponsmassdestructionfpacapitalwarnswecouldget
onslaughtselling
[7]http://www.zerohedge.com/news/20161029/jpmwarnsshiftpassiveinvestingincreasessystemicriskwillmake
crashesworse

http://www.zerohedge.com/print/595856 2/2