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Blog Post About the Market Distortions Created by Index Funds


Here is an interesting article from the Financial Times which I would like to share with you. It draws a connection between the wild trading in GameStop, Tesla, and others, with the rise of passive index investing.



If you're not interested, I understand. The gist of the story is that index funds never sell unless they experience outflows from their funds. If GameStop goes to $400, or Tesla to $900, they buy and buy, at any price. No one is actually minding the fund.


Given the $ billions flowing into index funds, this phenomenon could seriously distort prices in the marketplace, and the author suggests that we have seen such distortions already.


Ironically, as an aside, the article highlights something which I have mused about for a long time. If everyone in the world goes to index investing, it will work much less well and will create great opportunities for active investors.


Carson Block is a prominent professional short-seller. He has an axe to grind. Still, I liked his reasoning and think that it holds some explanatory power over price behavior in certain very hot stocks.


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