[throwaway34241]

Can you expand on how index ETFs are a bubble? You say that there's wide consensus, but when I researched it the consensus seemed to be that indexing was the right strategy for most people (and even sophisticated investors like Warren Buffett have instructed his trusts to use an indexing approach).

Beating the index is a zero-sum game, for every winner there must be a loser. Of course you can make educated choices based on the fundamentals but the same is true for sports betting too. Unlike sports betting, you are directly competing against a large number of pretty smart people who play this zero-sum game as a full time job. And some of them even have inside information.

Not that it's impossible to win of course. I can easily imagine someone with deep expertise in a certain area having a key insight about a specific company that others don't, or someone who analyzes company balance sheets and business fundamentals to come up with an independent valuation being above-average at that. It's hard to imagine that either of these groups represent the average person who will trade fractional shares on Robin Hood though.

[tempsy]

If everyone just buys the index, then the underlying stocks that make up the index are propped up in a way that wouldn't be the case if that individual stock was not a part of said index.

(This is not hypothetical it is actually happening)

[throwaway34241]

The idea with index investing is usually to buy a total stock market index. The whole stock market is in the index, so saying the index is in a bubble is basically the same as saying the stock market itself is in a bubble.

Which could be, but isn't an argument for buying individual stocks instead of the index, since that doesn't avoid the problem.

[dmurray]

This is a pretty reasonable theory. And it's true, if everyone indexes then stocks generally become mispriced. But this theory only applies at the extreme, not at the margins if say 50% or 90% of money is in index funds. If a few savvy traders buy the good stocks and sell the bad ones, they make a profit and the stocks become "correctly" priced again.

In one view of the market, this is what all those hedge funds are paid to do. They keep the prices correct and extract some money, while everyone else indexes and pays them a small fraction of their returns. Of course, hedge funds aren't getting much of that pie these days.

[crazygringo]

It is hypothetical, because you're ignoring the other side of the equation: all the sophisticated investors (hedge funds etc.) who detect that stocks are temporarily propped up in some sector and will collapse, and so go short at the inflated prices... thus lowering prices.

Companies always face a reckoning point, on their individual timelines.

It's just arbitrage 101. Nothing stays mispriced forever. And the sooner the "other side" figures it out, the quicker prices correct -- so you've got to be fast. Which is exactly what sophisticated investors are.