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The FT publishes an editorial about “The risks in the power of stock market indices”, noting that the rise of passive investing has increased their influence. Thread #markets #equities #valueinvesting https://www.ft.com/content/b9b856c6-45a5-4dd6-b237-2e339acefb12
1/The problem are not the indices but the ETFs that might be built to replicate them, and the laziness of investors who might take inclusion of a stock in an index as validation.
2/I am strongly in favour of broad market indices without any artificial restrictions to membership/weightings. The ideal is to achieve exposure to the real market, warts and all. Narrower indices with strict admission criteria are covert attempts at active management.
3/ Index makers as closet managers are more clearly at play in sector/thematic indices (i.e. how do you decide which sector/theme specific stocks fit into). In the end, it is difficult to tell apart a fund with clearly set out investment criteria from a frequently adjusted index.
4/Non-ETF funds that hug indices are the worst. They charge fees for someone else’s investment decisions. Transparency is important, but not only about the index.
