According to the investor who was lucky enough to be among the handful of people who profited from the meltdown, the increase in passive investment vehicles, such as index funds and exchange-traded funds, has led to the generation of a bubble, very much like the U.S. subprime during the financial crisis in 2008.
When speaking to Bloomberg in an interview, Michael Burry stated how passive investing has led to an over-estimate of large-cap stocks, which are recipient to hordes of investments following such strategies.
Michael Burry is a qualified doctor who switched to investing. Burry was profiled in Michael Lewis’s “The Big Short” due to his call on the hidden trouble in mortgage-backed securities prior to the 2008 financial crisis.
Burry stated how passive investments have made ay for inflated stock and bond costs, just like the United Stated real estate right before 2008, boosted by hurdle-free lending by banks, which packed and sold lesser than average/subprime loans via intricate securities for instance collateralized debt obligations.
Michael Burry said: “Like most bubbles, the longer it goes on, the worse the crash will be,” said Burry, who oversees about $340 million at Scion Asset Management in Cupertino, California. One reason he likes small-cap value stocks: they tend to be under-represented in passive funds.”
He stated how it is very similar to the bubble in synthetic asset-backed CDOs prior to the Great Financial Crisis, for instance the price allotment in the markets was done by massive capital flows founded on Nobel-approved models of risk (which proved to be incorrect), rather than fundamental security-level analysis.
As stated by data released by Vox Markets, exchange-traded funds constituted 2% of the United States trading volumes in year 2000. This number has dramatically increased to 45% of the total assets in U.S. stock based funds.