The Fundamental Problem with Index Funds

06.09.2016 • Investing

From Investor Passport (Argentina) –

Index funds do not set prices; they only accept the prices that investors are already establish. If everyone had index funds, he says, “nobody” would be doing the research to find the price of these securities.

Even John C. Bogle, founder of Vanguard Group who launched the first indexed mutual fund 40 years ago this month, agrees that passive investment can be too good for the public good.

“What happens when everyone has index funds?” He asks. “Chaos, chaos without limits. You cannot buy nor sell, there is no liquidity, no market. ”

But, he adds, that would require immense growth rates from current levels. Probably until passive funds are not at least 90% of the market, then chaos may not happen, he explains.

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