Why Index Fund ETFs is like One Giant Stock

The whole premise of passive investing is that you can buy an index fund that is a basket of the broader stock market. What it didn’t account for is the explosive popularity of low cost index funds. With people moving away from actively managed portfolios into passive stock invested, it has greatly increase the total market cap of all index tracking ETFs. This has a major disadvantage in that all these stocks are essentially being tied together. When one sells a share of an ETF, you sell all of it. That isn’t the issue by itself but it becomes one when a sizable portion of the ENTIRE stock market are in these funds. This changes the previously loosely correlated stocks to a highly correlated one. Watch to find out what the implications for this is.

How’s it going everybody this is beat the bush today i’m gonna talk about index fund investing in other words most people these days most savvy people like to do passive investing today i’m going to talk about how this passive investing method is not as passive as you think it is and it’s not as diversified as you think it is if you look all over the net look on

The news look on the finance blogs every single news outlet is saying that people are taking their money out of mutual funds out of these actively managed portfolios because there is some theory behind it because you know whenever they do actively manage they in a large sense do not actually outperform the smp 500 so it’s really really hard to do and now hoards

Of people are just investing in this passive funds something that has a low cost in the range of 0.03 to 0.05 percent every single year and basically they just plop this money into an etf fun now you gotta know if you add up all the companies in the smp 500 the market cap for these 500 companies is around 25 trillion dollars if you then go back and look at the

Passive investing funds all the etf funds that invest in the smp 500 you’ll see that the market cap of s py is point two six six trillion ivv is 0.18 five trillion vo o is point four five nine trillion and so this leads me to wonder well what if you add up all the passive investing low-cost etf fun that’s invest in the smp 500 if you add all this up how much of the

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Market is actually passively invested so if you go and dig around and look at this there are various financial companies that already came up with this vigor unfortunately each source does not always agree with another but you know what i found is generally they say it’s between 15 and 30 percent right now for example one article said that out of the total market

Cap of the us stock market right this is huge twenty five trillion twenty-nine percent of this they are all in passive etf funds so this is a significant amount frankly it doesn’t really matter exactly how many percent we only need to know that okay it’s hovering around fifteen to thirty percent so it’s a large chunk of the total us stock market so i want to give

This perspective that let’s say every single person in the us stock market only buy low-cost etfs that means whenever someone sells they’re selling a basket of stocks right so it essentially ties all these stocks together one whole us stock market becomes one single stock but of course right now the stock market is not quite there yet only 15 to 30 percent is tied

Together if this makes sense so this is a very troubling issue here because all these stocks that are in these indexes they’re essentially correlated together they are essentially tied together by the percentages that they are weighted in that particular stock index so one of the main reasons for buying an smp 500 is to get a diversified portfolio of 500 different

Stocks but when you have 15 to 30 percent of the stock market in one single fund they act in unison you cannot just go on your brokerage firm and then go oh i want to sell you know some of these stocks within that index when you sell one share of index you’re selling the entire index so the point i want to make is let’s say you can buy a stock market index fund

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That has every single stock there is weighted the way it is today so instead of 500 stocks you have every single stock in the us stock market but because 15 percent of it is highly correlated together they’re essentially tied together 15 percent of this entire stock fund that you buy is actually one single stock but when you look at the smp 500 the highest weighted

Stock is actually only about 3% so the troubling part here is that when you buy the stock market index fund you’re not being diversified because they are all being treated as one and because they’re so popular now everyone treats the whole basket as one thing so what i think you’re seeing right now is actually a stock market bubble in passive investing etf funds they

Are essentially going higher and higher and is actually a good thing to be in it because yeah it pushes the price higher and higher however whenever there is a downturn if if a downturn comes and when it does go down it’s gonna be that much more volatile because people are going to get scared the type of people that are invested in this type of fund probably might

Not have gone through the oh eight boom or the dot-com bust in oh one so most of these people although they are being told that you should just passively invest you should just keep on buying it and not really sell at any point i feel that there will be a good percentage of them that will run for the hills whenever you see i don’t know 30 percent market dropped 40

Percent market drop you know you see the market drop a little bit at a time you know one week is 10 percent and then you have a long duration of these market drops maybe 6 months 18 months or something and then after it hits you time after time week after week oh it’s gonna keep on dropping and then you think that it’s bottomed out and then the next week it drops

Another 5 percent another 10 percent if the market keeps on doing this week after a week and then you start to get worn down and you start to think oh my gosh the market really is you know this is the time where it’s finally gonna go down forever you know it’s gonna go down at 10 percent there’s no hope that it’ll ever recover then you’re gonna see a lot more people

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Selling just like how it’s always been people get scared people sell and then people always sell at the wrong time so what are you gonna see in these low-cost passive stock market index fund is that whenever something bad happens it’s going to emphasize this a little bit more the volatility is gonna go up because people are holding these indexes so what can you

Do to get around this there’s very little that you can do because i mean the smp 500 holds 500 very very popular and in-demand stocks and if you buy something outside of it then you know you’re not gonna get as good a performance possibly if you try to buy a thing called a total stock market fund where instead of 500 they hold 2,500 different stocks instead well

You’re still gonna have like one fifth of it that is part of the smp this is not to say that you should know by anything within the smp it’s just saying that this is how our market is now it’s just tied together a lot more than before and this is something to watch out for going forward so i think there’s something to glean from this because if you think that the

Total stock market 15 percent of it is just one single stock now this framework will allow you to invest in it in a different way possibly to make some money off of thanks for watching this video don’t forget to give me a like comment down below let me know if you think 15% of the stock market is just one single stock now and as always don’t forget to push that

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Why Index Fund ETFs is like One Giant Stock By BeatTheBush

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