Jack Bogle Warns Of Market "Chaos, Catastrophe" If Passive Investing Wins

In 2016 investors poured $480 billion into passive funds, a mix of mutual funds and exchange-traded funds, while pulling more than $380 billion from active mutual funds, according to data compiled by Bloomberg. Passive equity investments may become as much as 45 percent of the mutual fund industry within five years as investors move to low-cost funds, Bogle said in an interview on Bloomberg Radio in March. But just how much can the market take?

"If everybody indexed, the only word you could use is chaos, catastrophe," warned Jack Bogle, 88-year-old founder of Vanguard, at the Berkshire Hathaway annual meeting on Saturday.

“There would be no trading,” Bogle told Yahoo Finance editor-in-chief Andy Serwer. “There would be no way to turn a stream of income into a pile of capital or a pile of capital into a stream of income... the markets would fail."

 

“We have too much trading in the market,” Bogle said. “The index really just neutralizes x-percent of the market… And it just, those stocks don’t get traded. So the other stocks would get traded, the market would go on as ever."

 

“So [the market] gets a little less efficient, but if it gets less efficient some managers can win by more. And some managers will lose by more. This is the equation. So, I’m not concerned about it. It’s going to take a long, long time [for indexing to get] anywhere near 50% [of the market], and things will change a lot in other ways by then."

 

“Markets are going to be efficient as long as there are managers, or investors, trying to find little holes in the system... price discovery, as they call it,” Bogle said.

Yahoo's Myles Udland reports that currently, Bogle notes, about one-quarter of the U.S. stock market is currently indexed. In his view, indexing could account for 50% of the market “easily.” Asked by Serwer what level of indexing would concern him, Bogle said he expects indexing could exceed 75% of the market and not have it become dangerous.

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