The move toward index-based investing has been relentless in recent years. Investors have pulled billions from actively managed funds and put them into index funds and index-based ETFs. Ned Davis of Ned Davis Research thinks the trend toward passive investing is a bubble that may be ready to pop. Barron’s summarizes his views.
Meanwhile, Ned Davis of Ned Davis Research thinks we’re in the late stages of a bubble in passive investing. “Not only have index funds outperformed, but the crowd has noticed,” he writes. Over the past year, investors have yanked billions from actively managed funds and plowed more than $234 billion into U.S. stock ETFs.
“When one buys an S&P 500 index fund, one buys all the stocks in the index—whether cheap or expensive,” Davis writes, and today the price-to-sales ratio of the median stock has surpassed its level in 2000 and 2007. Trillions pumped by global central banks have lifted assets in tandem and made everything look more attractive relative to cash. But lately that correlation is fraying, a sign that “the trend toward passive investing is overextended.” Davis thinks the next five years will present great opportunity for active managers to outperform passive indexes.
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