It has taken decades for indexing to become a force in the world of investing. These days we take for granted that fact that indexing, in all its forms, and for many its preferred vehicle, ETFs, are a good thing. In short, ETFs have made available a broad range of index products at a low cost to both individual and institutional investors. From this perspective indexing seems like an unmitigated good.
However a recent paper looks at the broader economic implications of a world in which indexing plays a prominent role. In short, indexing can affect fundamental valuations, market correlations and a “confused” risk-return relationship. For now the focus on ETFs remain, but one could foresee a future in which stock pickers once again become real alpha generators. In today’s screencast we look at the rise of indexing and its role on the capital markets.
Posts mentioned in the above screencast:
On the economic consequence of index-linked investing (ungated). (SSRN via Abnormal Returns)
The negative effects of indexing. (FT Alphaville)
A new low-cost indexing strategy. (Falkenblog)
Is there sufficient regulation of ETFs? (Lex)
Are ETFs leaving money on the table for stockpickers? (Lex)
Indexing requires a healthy amount of competent stockpicking to be a viable strategy. (Money Game)
The forthcoming golden age of stock picking. (Abnormal Returns)