WTF Chart Of The Day: There Are Now More Indexes Than Stocks

Tyler Durden's picture

For the first time ever, the number of market indexes now exceeds the number of U.S. stocks...

As Bloomberg reports, traditional ones such as the S&P 500 are collections of securities weighted by market value, and index funds mimic them as a low-cost way to deliver the market’s performance. Many new indexes are different: They include stocks based on custom criteria, such as having low volatility or high dividends. The recent explosion in indexes has been driven by demand as many new benchmarks essentially repackage active investment strategies into indexes, says Eric Balchunas, senior exchange-traded fund analyst at Bloomberg Intelligence. They can then be tracked by so-called smart-beta ETFs, which fund companies are rolling out rapidly. Money managers are under pressure to cut costs, says Balchunas, as investors shift their money into funds with low fees. Smart-beta ETFs are generally more expensive than S&P 500 funds but cheaper than actively managed funds. It remains to be seen how well the new funds will perform.

As we wrote previously, for now, the debate about the impact of ETFs rages, and will do so inconclusively as long as trillions in central bank liquidity prop up broader risk assets and equity markets. It is only once central banks take start soaking up some $18 trillion in excess liquidity that the true impact of ETFs will be visible. Until then, we leave readers with thoughts from a recent note by JPM's Nikolaos Panigirtzoglou, first reported here last October, and summarized below, on what the take over by ETFs really means:

  • Markets become more brittle, risky: "The shift towards passive funds has the potential to concentrate investments to a few large products. This concentration potentially increases systemic risk making markets more susceptible to the flows of a few large passive products."
  • Passive or index investing favours large caps as most equity indices are market cap weighted. "This could exacerbate the flow into large companies beyond to what is justified by fundamentals, creating potential misallocation of capital away from smaller companies. To the extent that these passive funds become even more dominant in the future, the risk of bubbles being formed in large companies, at the same time crowding out investments from smaller firms, would significantly increase."
  • The proliferation of index funds increases the size of stock inclusion flows. In turn, market moves around index constituent changes become more pronounced overpenalizing companies leaving the index and causing excessive gains to companies entering the index.
  • Crashes, when they happen, will be bigger and badder: "the shift towards passive funds tends to intensify following periods of strong market performance as active managers underperform in such periods of strong market performance. In turn, this shift exacerbates the market uptrend creating more protracted periods of low volatility and momentum. When markets eventually reverse, the correction becomes deeper and volatility rises as money flows away from passive funds back towards active managers who tend to outperform in periods of weak market performance."
  • Markets become less efficient: "if passive investing becomes too big, potentially crowding out skilled active managers also, market efficiency would start declining. In turn, this would present opportunities for active managers to extract arbitrage profits."

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Raffie's picture

So all the indexes show how the mocket is really a casino or gives mass data to confuse people to keep them in the casino.

johngaltfla's picture

So if Shenandoah gets seed money from GS and then creates Blue Ridge and invests in all of the above, what could go wrong?

pugilist's picture

meh, indices of indices is where it's at!

Born2Bwired's picture

Wow you must be really old if you remember that! it was in the 20s! :)

ebworthen's picture

Yup.  More people betting on 30-1 odds on double-sixes.

"I need to pay off the mortgage!"  "I'm investing for my retirement!"  "I feel lucky!" 

Mr 9x19's picture

obviously alcohol and removed clocks on walls don't make the job anymore.

GUS100CORRINA's picture

This explains why stocks like TESLA are so mispriced. Indexes are forced to buy the stock even though it is over valued.


small axe's picture

Don't tell the Bank of Israel, they'll send more dual-national Phd economists to help the Fed with index management

Zorba's idea's picture

Do index funds prefer GAAP or NonGAAP accounting principles? It's obvious which stocks prefer.

mavenson's picture

for these they prefer GAPE, (Genuinely Arbitrary Percentages and Equations)

Stormtrooper's picture

Whee, this 300 mph rocket sled is fun!!  But, is that a wall just ahead of us!!!

Boris Badenov's picture

So what? An index is a spreadsheet.

An ETF is another matter entirely, it is an arbitrageable current day futures contract. WAKE UP!

Boris Badenov's picture

To issue more shares of an ETF, it gets SHORTED.

(When it is at a premium to the stocks it contains).

Milton Keynes's picture

Sometime in the 80's there were more Funds then stocks.

FinsterF's picture

Most of these are being called "indexes" just because they're designed to be tracked by "index" funds. But really they're rule based management. These funds get called "passive" because security selection is done by rule rather than subjective judgment, but they're not necessarily fundamentally different than "active" funds.

There are actually very few funds that are truly passive in that they simply own the entire market ... even the S&P includes just 500 stocks selected by a committee. It also selects just US stocks ... excluding thousands around the world. Wouldn't a truly passive stock fund just own them all? Otherwise there is a whole lot of selecting going on ...

There's definitely a stock market bubble, but blaming it on passive indexing is getting to be a bubble in itself.

RSDallas's picture

This is our next financial debacle and guess what it won't ring a bell when trouble starts! Synthetic investments, just think about that....................????????????????????????????????????

bonin006's picture

There could be a lot more. In fact, for 3700 stocks the number of different combinations is 2 to 3700th power, and that only considers inclusion or exclusion of each possible stock, not various weightings of the stocks. We will probably have to wait a while to get to the maximum possible though, as 2 to the 332 power is allready almost 10 to the 100th power, which is a Quintillion (a million trillion) times the number of atoms in the visible universe, so it will require faster than light travel to access enough material to store and present all of the possibilities. Or maybe quantum computers, which have been heavily touted recently by experts as soon to be capable of fantastic leaps in computation power, can solve the problem. I have great faith in experts because whenever they say something they sound so confident, and I cannot ever remember an expert admitting to being wrong.

Dre4dwolf's picture

This signals to me that the index funds are actually insolvent.


TrumpRally's picture

Much ado about nothing?

tangent's picture

The market cap of the index funds would be one metric to look at given the points of this article, not the number of index funds. The most important metric would be valuation of well managed companies vs badly managed companies. Good luck figuring that one out!

A. Boaty's picture

Route your trades thru IEX to avoid the HFT ripoff.

Velocitor's picture

I want to create a several mutual funds of indexes, and then make an index of those mutual funds, and then trade options on that index, because that's how the market efficiently allocates capital to the most effective business plans.

hongdo's picture

Used to be you bought a tractor

Then you bought stock in the company that made the tractor

then you bought an index fund that included the company that made the tractor

Then you bought an index of index funds where one of them included thre company that made the tractor

Then you bought a 3X leveraged index of index funds where one of them included the company that made the tractor

Then you bought a derivitive based on he volitivity of he index fund that ....

Oops, my farm was foreclosed, don't need the tractor anymore.

DIGrif's picture

With retards running around in this environment and thinking it is "normal" is there any doubt why Bitcon exists or why it is so highly valued? We have a whole lot of folks in this world that see nothing wrong with buying a fiat currency that is based on a fiat currency. Who then doubly think that the second fiat can be worth more of the first fiat, which in our case is based on not a damned thing.


Buy PHYSICAL gold, and wait.

Future Jim's picture

just testing the comment editor on this dead thread