Passive Investing Madness: 50,000 Stocks vs 3.7 Million Indexes

Bloomberg reports there were 438,000 New Indexes Created Over the Last Year.

Benchmarking giants like S&P Global Inc., MSCI Inc. and the London Stock Exchange Group Plc’s FTSE Russell created 438,000 new indexes over the 12 months through June 30, according to a study from the Index Industry Association. Gauges tracking bonds and companies that address environmental, social and governance issues helped fuel the rise.

There are now more than 3.7 million benchmarks globally, the survey showed. That dwarfs the roughly 50,000 stocks that trade on exchanges around the world.

Index providers generate billions in fees by licensing their benchmarks to providers of passive investment vehicles like exchange-traded funds. S&P, MSCI and FTSE together took in more than $2 billion in revenue last year despite issuers taking fees on many indexed funds down toward zero. Licensing more benchmarks, which typically is an asset-based payment, helps offset the lower charges.

I would be curious to know how many indexes hold the FANGs: Facebook, Amazon, Apple, Google, and Netflix.

Passive investors think they are diversified. That’s doubtful. More importantly, it will not matter in another big decline.

Mike “Mish” Shedlock

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Six000mileyear
Six000mileyear
5 years ago

Investor complacency is one of the symptoms of market tops. Even complacency is in a bubble.

MorrisWR
MorrisWR
5 years ago

My only use for these vehicles is to trade the options of the underlying index. Passively buying them, as stated, is for people who would rather not learn or do any work to discern good companies with potential for an above aberage return.

FelixMish
FelixMish
5 years ago

If you use a dart board to pick your stocks, you can make your own index with very, very low overhead costs. LIke, a few bucks every rare time you swap with cash.

How many stocks do you need to make a diversified index? A little computer program can show that if you have 30 stocks, you’ll track the S&P 500 pretty well. The fewer stocks, the less accurately you’ll track an index that includes many, many stocks.

As Mish points out, stocks aren’t the only game in town, though. So, there’s always the question of what other forms of “money” you want to have to give you wider diversification.

Stuki
Stuki
5 years ago

This is what passes for “doing work” in a world where all source of income is derived directly from Fed welfare.

And people wonder why there’s no money left for the middle class guys who are actually doing something useful. Then, to solve that “mystery, ” the guys making up, and paying attention to, indexes are invited to the White House….

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