Index Funds Will Be Fine Confronting Cruel Markets
The claim that passive investors will suffer more in an equity slump doesn’t hold up.
Bloomberg, August 15, 2018
This past week, I came across such an odd column about index funds in the Times of London — “The risks of passive funds will be cruelly exposed in any correction” — that I had to write about it:
It is natural to fear what we do not fully understand, especially when one benefits from the status quo.[i]
But we already have the answer to that question, courtesy of how investors behaved during the great financial crisis, circa 2007-09. As my Bloomberg colleague Eric Balchunas points out, during the 2008 great financial crisis, money flows were into index funds and ETFs by about +$205 billion dollars, and out of active mutual funds by $259 billion. And, he adds, the majority of those active inflows went into equities, not fixed income.
That peak-to-trough 57 percent sell off gives us a good idea how passive indexers will behave when markets crash: they become net buyers versus the active investors net sales.
Beyond that crash, we have seen several corrections since 2009. My RWM colleague, Michael Batnick, observes that from May to October, 2011, the S&P 500 fell 21.6%. Or what about May 2015 through on February 2016, when the S&P 500 fell 14.2% on “but the median S&P 500 stock fell 25%, and other areas of the market got destroyed. The Russell 2000 fell 26%, Emerging Markets fell 36%, transportation stocks fell 26%, and Apple Netflix and Amazon each lost 30%.”
During those corrections, passive investors just kept on trucking.
See the full column at Bloomberg