Question

Burry suggests there is a passive investing ‘bubble’. What are the characteristics of equities that are most exposed to a passive investing ‘bubble’?

Answer 1

Passive Investing: It is one of the investment strategies to maximize returns by minimizing buying and selling. Investing in Index funds (example; S&P 500, FTSE 100, FTSE 250) is one of the common strategies where in investors purchase a representative benchmark for a long time with minimal trading in the market. It is one of the cheaper investment strategies and less complex and often produces superior after-tax results. The goal is not to beat the market, but to match its performance.

Major characterises are of these indexes are;

Large cap- companies in the index list.

Specific or predetermined set of investments with little/ no variance.

As mentioned, these are not specific equities rather index. There has been a rapid increase in passive investing in recent years and Burry’s concern is that it will all come tumbling down. Mainly because many of the stocks traded, even in the best-known indices containing the largest stocks, are low volume, with low liquidity. The worry is that the prices of these less-traded equities are being influenced by the billions of dollars flowing into them from funds. If passive investors suddenly sell their funds (including institutional investors and pension funds), the stocks linked to them will be badly affected and their prices rapidly decline.