Active Management a sham

phlebas192

Linton said:

Bostonerimus1 said:

Active managers all say that they can beat the market ie. everyone says they can be above average, think about that.

Many people say that in small "inefficient" markets active funds are better than index trackers, but most people now invest globally and any perceived advantage that might have been gained because of a home bias will be pretty small....if it even exists. Active funds have higher fixed costs than index trackers and so I can't see a reason to use them for the vast majority of people. Just construct your asset allocation from inexpensive trackers and don't fiddle with it. Once you've taken the active step to construct a portfolio be passive in managing it.

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields. A total return approach from an index fund portfolio is probably as good, if not better, but active funds will always have the psychological advantage over a tracker portfolio because people are paying a professional for their expertise in constructing an income portfolio. The crux of "active vs passive" is whether that expertise is worth anything. But as long as you avoid the active dogs, like Woodford, you'll probably be ok, it's just knowing which active funds are going to bark. This pithy truism from Jack Bogle comes to mind "In investing, you get what you don't pay for"...ending a sentence with a proposition, Bogle wasn't an English professor, but he did see the fallacy in active management and the vested interests that profited from it.

I dont think most active equity fund managers generally talk about beating the Index.  They may use one as a benchmark but that is as far as it goes. At least in the UK, the US may be different.  What makes an active fund of interest to me is to have a well defined strategy investing in particular sections of the global market. 

I run 2 completely separate portfolios which are currently of much the same size. The objective of one is to produce steady income of around 6% of investment value by investing in a very broadly diversified set of funds with no less than 5% in any one fund. The second portfolios role is to produce inflation beating capital gains in the medium term sufficient to top up the income portfolio when necessary and cover large one-off expences, mainly holidays.

Each portfolio's objectives lead to corresponding requirements in turn leading to desired asset allocations in terms of asset class, geography, sectors etc. Meeting the allocations makes some use of active funds essential as blind use of market capitalisation based funds cannot achieve it.  The income portfolio is 100% active since passives cannot provide the desired level of income and cannot access as broad a set of underlying assets as is required.

The growth portfolio is 100% equity.  Just over 50% is passive covering US, Europe, and China.  The rest are active covering US and European Small Companies, Japan, and general EM, making 7 funds in total. 

Anyone reading this far may have noted that beating any index is not a requirement.  All that matters is that the required level of spending can be afforded without significant ongoing management or sleepless nights worrying about the future.

I operate a variation on this approach. About 80% of our equities are in an 'income' portfolio which exists entirely of investment trusts, so actively managed. Although I consider this to be income it has both some ITs that pay out high yields (eg HFEL and NCYF) but also low yielders (eg FCIT, GSCT and CLDN). The former pay out significant income "now" but with very little increases year on year whilst the latter don't pay out much but their increases generally beat inflation. Overall yield is about 4% which is sufficient to exceed our average annual expenditure. ITs allow me to put money into private equity, infrastructure and property sectors that aren't really going to appear in so-called passive investments.

The remaining 20% of the equities are in a portfolio of individual UK listed companies selected using set criteria. This has beaten the FTSE All Share Total Return index by some 5.6% pa over the 25 years it has been running (which is, of course, impossible ) It doesn't beat it every year but has done so for 18 of the 24 full calendar years it has been running.

The majority of the income portfolio is in my wife's SIPP which is at a level where the frozen basic rate tax band is going to be an issue once she starts getting the SP so rises above inflation have been sold down and put into gilts. These now make up about 17% of the income earned in the SIPP. We've also got cash reserves sufficient to meet all non-discretionary spending up to state pension age if for some reason ITs that have been increasing their dividends for 50+ years suddenly stopped paying out at all...

I do tend to measure performance against the FTSE All Share Total Return index but it's more of a secondary feature and just to sense check that I'm not doing something really bad. The real measure I use is by how much the income is increasing - a headline increase of 14.4% for 2025 and 7.7% allowing for cash flows and excess dividends that were reinvested.

tigerspill

phlebas192 said:

Linton said:

Bostonerimus1 said:

Active managers all say that they can beat the market ie. everyone says they can be above average, think about that.

Many people say that in small "inefficient" markets active funds are better than index trackers, but most people now invest globally and any perceived advantage that might have been gained because of a home bias will be pretty small....if it even exists. Active funds have higher fixed costs than index trackers and so I can't see a reason to use them for the vast majority of people. Just construct your asset allocation from inexpensive trackers and don't fiddle with it. Once you've taken the active step to construct a portfolio be passive in managing it.

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields. A total return approach from an index fund portfolio is probably as good, if not better, but active funds will always have the psychological advantage over a tracker portfolio because people are paying a professional for their expertise in constructing an income portfolio. The crux of "active vs passive" is whether that expertise is worth anything. But as long as you avoid the active dogs, like Woodford, you'll probably be ok, it's just knowing which active funds are going to bark. This pithy truism from Jack Bogle comes to mind "In investing, you get what you don't pay for"...ending a sentence with a proposition, Bogle wasn't an English professor, but he did see the fallacy in active management and the vested interests that profited from it.

I dont think most active equity fund managers generally talk about beating the Index.  They may use one as a benchmark but that is as far as it goes. At least in the UK, the US may be different.  What makes an active fund of interest to me is to have a well defined strategy investing in particular sections of the global market. 

I run 2 completely separate portfolios which are currently of much the same size. The objective of one is to produce steady income of around 6% of investment value by investing in a very broadly diversified set of funds with no less than 5% in any one fund. The second portfolios role is to produce inflation beating capital gains in the medium term sufficient to top up the income portfolio when necessary and cover large one-off expences, mainly holidays.

Each portfolio's objectives lead to corresponding requirements in turn leading to desired asset allocations in terms of asset class, geography, sectors etc. Meeting the allocations makes some use of active funds essential as blind use of market capitalisation based funds cannot achieve it.  The income portfolio is 100% active since passives cannot provide the desired level of income and cannot access as broad a set of underlying assets as is required.

The growth portfolio is 100% equity.  Just over 50% is passive covering US, Europe, and China.  The rest are active covering US and European Small Companies, Japan, and general EM, making 7 funds in total. 

Anyone reading this far may have noted that beating any index is not a requirement.  All that matters is that the required level of spending can be afforded without significant ongoing management or sleepless nights worrying about the future.

I operate a variation on this approach. About 80% of our equities are in an 'income' portfolio which exists entirely of investment trusts, so actively managed. Although I consider this to be income it has both some ITs that pay out high yields (eg HFEL and NCYF) but also low yielders (eg FCIT, GSCT and CLDN). The former pay out significant income "now" but with very little increases year on year whilst the latter don't pay out much but their increases generally beat inflation. Overall yield is about 4% which is sufficient to exceed our average annual expenditure. ITs allow me to put money into private equity, infrastructure and property sectors that aren't really going to appear in so-called passive investments.

The remaining 20% of the equities are in a portfolio of individual UK listed companies selected using set criteria. This has beaten the FTSE All Share Total Return index by some 5.6% pa over the 25 years it has been running (which is, of course, impossible ) It doesn't beat it every year but has done so for 18 of the 24 full calendar years it has been running.

The majority of the income portfolio is in my wife's SIPP which is at a level where the frozen basic rate tax band is going to be an issue once she starts getting the SP so rises above inflation have been sold down and put into gilts. These now make up about 17% of the income earned in the SIPP. We've also got cash reserves sufficient to meet all non-discretionary spending up to state pension age if for some reason ITs that have been increasing their dividends for 50+ years suddenly stopped paying out at all...

I do tend to measure performance against the FTSE All Share Total Return index but it's more of a secondary feature and just to sense check that I'm not doing something really bad. The real measure I use is by how much the income is increasing - a headline increase of 14.4% for 2025 and 7.7% allowing for cash flows and excess dividends that were reinvested.

You mention an overall yield of 4% - is this above inflation - i.e. in real terms?

Pat38493

Secret2ndAccount said:

The question was whether Active Management is a sham. The answer is yes. That doesn't mean that all funds are a sham.
Suppose you wanted to invest in the FTSE100. You could go out and buy a little piece of each of 100 different companies in the correct proportions. However that comes with several downsides. You would pay 100 charges to buy (and eventually sell), and it would take a lot of your time to constantly rebalance by buying and selling more shares to keep the proportions in line with the index. So, instead, you purchase an index fund. The fund manager does all the work for you in exchange for a modest annual fee. Funds are a necessary and useful element of investing.
If a fund manager says to you "don't buy the index. I can beat the index" then it's a sham. He can't beat the index. He just wants your fee. Active funds make their money by collecting your fee, not by investing money well. If they were that good at investing, they would borrow money, invest it, and live off the gains - they wouldn't need your money at all. But they know that markets are hard to predict, and they can't be sure of making any gains. So they advertise cleverly, and live off your fees whether they make any gains or not.
If someone tells you they can beat an index, there is a very high probability that they won't. But you will pay them 1% instead of 0.2% for their trouble. Watching the TV yesterday, first reports for 2025 are in: 70% of active funds failed to beat their index last year. Over the long term that proportion will rise to over 90%. You are paying them fees for nothing.
If you want Growth or Value or Asia  or Small Cap  there are index funds available for all of those. Don't pay extra fees for active managers who will not do any better than the index.

An interesting side question here is - what would happen though, if everyone in the world all believed this and everyone just bought index funds and nothing else?

I am pretty sure something would go very wrong but I'm not sure how!  

Bostonerimus1

Linton said:

Bostonerimus1 said:

Active managers all say that they can beat the market ie. everyone says they can be above average, think about that.

Many people say that in small "inefficient" markets active funds are better than index trackers, but most people now invest globally and any perceived advantage that might have been gained because of a home bias will be pretty small....if it even exists. Active funds have higher fixed costs than index trackers and so I can't see a reason to use them for the vast majority of people. Just construct your asset allocation from inexpensive trackers and don't fiddle with it. Once you've taken the active step to construct a portfolio be passive in managing it.

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields. A total return approach from an index fund portfolio is probably as good, if not better, but active funds will always have the psychological advantage over a tracker portfolio because people are paying a professional for their expertise in constructing an income portfolio. The crux of "active vs passive" is whether that expertise is worth anything. But as long as you avoid the active dogs, like Woodford, you'll probably be ok, it's just knowing which active funds are going to bark. This pithy truism from Jack Bogle comes to mind "In investing, you get what you don't pay for"...ending a sentence with a proposition, Bogle wasn't an English professor, but he did see the fallacy in active management and the vested interests that profited from it.

I dont think most active equity fund managers generally talk about beating the Index.  They may use one as a benchmark but that is as far as it goes. At least in the UK, the US may be different.  What makes an active fund of interest to me is to have a well defined strategy investing in particular sections of the global market. 

I run 2 completely separate portfolios which are currently of much the same size. The objective of one is to produce steady income of around 6% of investment value by investing in a very broadly diversified set of funds with no less than 5% in any one fund. The second portfolios role is to produce inflation beating capital gains in the medium term sufficient to top up the income portfolio when necessary and cover large one-off expences, mainly holidays.

Each portfolio's objectives lead to corresponding requirements in turn leading to desired asset allocations in terms of asset class, geography, sectors etc. Meeting the allocations makes some use of active funds essential as blind use of market capitalisation based funds cannot achieve it.  The income portfolio is 100% active since passives cannot provide the desired level of income and cannot access as broad a set of underlying assets as is required.

The growth portfolio is 100% equity.  Just over 50% is passive covering US, Europe, and China.  The rest are active covering US and European Small Companies, Japan, and general EM, making 7 funds in total. 

Anyone reading this far may have noted that beating any index is not a requirement.  All that matters is that the required level of spending can be afforded without significant ongoing management or sleepless nights worrying about the future.

The "beat the market" might not be explicit, but many active funds will use terms like "superior performance" as a dog whistle for the greedy. Holistically we don't have very different strategies and I own one conservative active fund because of it's history and for sentimentality as well. I have an income portfolio from rent and pensions and then just leave everything else to grow in a mostly index fund portfolio with 80% equities and a small allocation to the active US Vanguard Wellesley fund which was the first fund I bought. The rental returned 6% income (after expenses) the first year on my initial investment, the rent and the value of the rental have both gone up over the years and this year's income was 7% of the current valuation. My pension had an initial payout rate of 7% and is index linked. I knew the numbers for the pension when  I took my final job and the rental is performing a bit better than I planned.

ColdIron

Pat38493 said:

Secret2ndAccount said:

The question was whether Active Management is a sham. The answer is yes. That doesn't mean that all funds are a sham.
Suppose you wanted to invest in the FTSE100. You could go out and buy a little piece of each of 100 different companies in the correct proportions. However that comes with several downsides. You would pay 100 charges to buy (and eventually sell), and it would take a lot of your time to constantly rebalance by buying and selling more shares to keep the proportions in line with the index. So, instead, you purchase an index fund. The fund manager does all the work for you in exchange for a modest annual fee. Funds are a necessary and useful element of investing.
If a fund manager says to you "don't buy the index. I can beat the index" then it's a sham. He can't beat the index. He just wants your fee. Active funds make their money by collecting your fee, not by investing money well. If they were that good at investing, they would borrow money, invest it, and live off the gains - they wouldn't need your money at all. But they know that markets are hard to predict, and they can't be sure of making any gains. So they advertise cleverly, and live off your fees whether they make any gains or not.
If someone tells you they can beat an index, there is a very high probability that they won't. But you will pay them 1% instead of 0.2% for their trouble. Watching the TV yesterday, first reports for 2025 are in: 70% of active funds failed to beat their index last year. Over the long term that proportion will rise to over 90%. You are paying them fees for nothing.
If you want Growth or Value or Asia  or Small Cap  there are index funds available for all of those. Don't pay extra fees for active managers who will not do any better than the index.

An interesting side question here is - what would happen though, if everyone in the world all believed this and everyone just bought index funds and nothing else?

I am pretty sure something would go very wrong but I'm not sure how!  

Price discovery would fail as no one would be making decisions and cause enormous mispricing of shares and company valuations

Secret2ndAccount

Pat38493 said:

Secret2ndAccount said:

The question was whether Active Management is a sham. The answer is yes. That doesn't mean that all funds are a sham.
Suppose you wanted to invest in the FTSE100. You could go out and buy a little piece of each of 100 different companies in the correct proportions. However that comes with several downsides. You would pay 100 charges to buy (and eventually sell), and it would take a lot of your time to constantly rebalance by buying and selling more shares to keep the proportions in line with the index. So, instead, you purchase an index fund. The fund manager does all the work for you in exchange for a modest annual fee. Funds are a necessary and useful element of investing.
If a fund manager says to you "don't buy the index. I can beat the index" then it's a sham. He can't beat the index. He just wants your fee. Active funds make their money by collecting your fee, not by investing money well. If they were that good at investing, they would borrow money, invest it, and live off the gains - they wouldn't need your money at all. But they know that markets are hard to predict, and they can't be sure of making any gains. So they advertise cleverly, and live off your fees whether they make any gains or not.
If someone tells you they can beat an index, there is a very high probability that they won't. But you will pay them 1% instead of 0.2% for their trouble. Watching the TV yesterday, first reports for 2025 are in: 70% of active funds failed to beat their index last year. Over the long term that proportion will rise to over 90%. You are paying them fees for nothing.
If you want Growth or Value or Asia  or Small Cap  there are index funds available for all of those. Don't pay extra fees for active managers who will not do any better than the index.

An interesting side question here is - what would happen though, if everyone in the world all believed this and everyone just bought index funds and nothing else?

I am pretty sure something would go very wrong but I'm not sure how!  

My first thought is that it won't ever happen. Index funds are, by their nature, average in their returns. There will always be those that wish to take a punt at getting higher than average returns. My view is that the majority of those (amateur or professional) who try to beat the average will fail to beat the average, but there will always be someone willing to try.

Secondly, there are many indices. If you want a bit of Japan, or a bias towards small cap, or less USA, you can still be invested in low cost index trackers. It becomes you who is the active manager. So there would still be free markets, volatility, liquidity. I think we'd be okay.

Ultimately, if everybody just invested 100% in MSCI World or something, there would be a lot of unemployed fund managers, and I beilieve the fees would go up - the fund houses still want their profits. If Vanguard decided to stubbornly hold out at a 0.2% fee, this would create an interesting tension. Charge a large fee and have no customers, or charge a low fee and have limited profits. This is somewhat like what befell the airline industry. You are only as smart as your dumbest competitor...

phlebas192

tigerspill said:

phlebas192 said:

Linton said:

Bostonerimus1 said:

Active managers all say that they can beat the market ie. everyone says they can be above average, think about that.

Many people say that in small "inefficient" markets active funds are better than index trackers, but most people now invest globally and any perceived advantage that might have been gained because of a home bias will be pretty small....if it even exists. Active funds have higher fixed costs than index trackers and so I can't see a reason to use them for the vast majority of people. Just construct your asset allocation from inexpensive trackers and don't fiddle with it. Once you've taken the active step to construct a portfolio be passive in managing it.

Having said that if you have a specific goal like income many people turn to actively managed closed end funds that target dividends and a yields. A total return approach from an index fund portfolio is probably as good, if not better, but active funds will always have the psychological advantage over a tracker portfolio because people are paying a professional for their expertise in constructing an income portfolio. The crux of "active vs passive" is whether that expertise is worth anything. But as long as you avoid the active dogs, like Woodford, you'll probably be ok, it's just knowing which active funds are going to bark. This pithy truism from Jack Bogle comes to mind "In investing, you get what you don't pay for"...ending a sentence with a proposition, Bogle wasn't an English professor, but he did see the fallacy in active management and the vested interests that profited from it.

I dont think most active equity fund managers generally talk about beating the Index.  They may use one as a benchmark but that is as far as it goes. At least in the UK, the US may be different.  What makes an active fund of interest to me is to have a well defined strategy investing in particular sections of the global market. 

I run 2 completely separate portfolios which are currently of much the same size. The objective of one is to produce steady income of around 6% of investment value by investing in a very broadly diversified set of funds with no less than 5% in any one fund. The second portfolios role is to produce inflation beating capital gains in the medium term sufficient to top up the income portfolio when necessary and cover large one-off expences, mainly holidays.

Each portfolio's objectives lead to corresponding requirements in turn leading to desired asset allocations in terms of asset class, geography, sectors etc. Meeting the allocations makes some use of active funds essential as blind use of market capitalisation based funds cannot achieve it.  The income portfolio is 100% active since passives cannot provide the desired level of income and cannot access as broad a set of underlying assets as is required.

The growth portfolio is 100% equity.  Just over 50% is passive covering US, Europe, and China.  The rest are active covering US and European Small Companies, Japan, and general EM, making 7 funds in total. 

Anyone reading this far may have noted that beating any index is not a requirement.  All that matters is that the required level of spending can be afforded without significant ongoing management or sleepless nights worrying about the future.

I operate a variation on this approach. About 80% of our equities are in an 'income' portfolio which exists entirely of investment trusts, so actively managed. Although I consider this to be income it has both some ITs that pay out high yields (eg HFEL and NCYF) but also low yielders (eg FCIT, GSCT and CLDN). The former pay out significant income "now" but with very little increases year on year whilst the latter don't pay out much but their increases generally beat inflation. Overall yield is about 4% which is sufficient to exceed our average annual expenditure. ITs allow me to put money into private equity, infrastructure and property sectors that aren't really going to appear in so-called passive investments.

The remaining 20% of the equities are in a portfolio of individual UK listed companies selected using set criteria. This has beaten the FTSE All Share Total Return index by some 5.6% pa over the 25 years it has been running (which is, of course, impossible ) It doesn't beat it every year but has done so for 18 of the 24 full calendar years it has been running.

The majority of the income portfolio is in my wife's SIPP which is at a level where the frozen basic rate tax band is going to be an issue once she starts getting the SP so rises above inflation have been sold down and put into gilts. These now make up about 17% of the income earned in the SIPP. We've also got cash reserves sufficient to meet all non-discretionary spending up to state pension age if for some reason ITs that have been increasing their dividends for 50+ years suddenly stopped paying out at all...

I do tend to measure performance against the FTSE All Share Total Return index but it's more of a secondary feature and just to sense check that I'm not doing something really bad. The real measure I use is by how much the income is increasing - a headline increase of 14.4% for 2025 and 7.7% allowing for cash flows and excess dividends that were reinvested.

You mention an overall yield of 4% - is this above inflation - i.e. in real terms?

Overall yield is the total dividends paid by the investment trusts divided by their current combined value so inflation doesn't come into it (a sensible comparison would be to the interest paid by a savings account). Overall gains are both dividends and share price movements which combined came to 16.8% over the year - significantly below the FTSE but that's not a benhcmark I care about for the income portfolio other than as a sense check.

Actual income from our year-end holdings of the ITs rose by 3% in 2025 which is slightly below inflation. The increase would have been higher if I wasn't selling down the ITs when they rose sufficiently above inflation and swapping them for gilts - this mostly involved the ITs that yield lower amounts but typically increase their dividends by more than inflation. It also reduces the overall return in a bull market, hence why that's not a figure I care about too much (it would most likely reduce the losses in a bear one). The gilts have higher yields than the ITs they were replacing so the overall income increased by considerably more than inflation - 2025 income in my wife's SIPP was 9.2% higher than 2024. I don't have the figures to hand as to what the dividend increase would have been if we had just held the same ITs at the start of 2025 to the end of the year, but it would almost certainly have been a bit above inflation.

One impact of selling the lower yielding / higher growth ITs is that future gains are likely to be lower. In the absence of tax issues this wouldn't be something I was likely to do but, as I previously said, my wife's SIPP is sufficiently large that once she is getting the SP then higher rate tax comes into play. So it makes sense to front load SIPP income now and put the excess into ISAs whilst also reducing the potential volatility. Until we are back to tax bands being increased in line with inflation, increases in income/capital are going to be only worth 60% of the gain but losses are going to amount to 80%.

phlebas192

Pat38493 said:

Secret2ndAccount said:

The question was whether Active Management is a sham. The answer is yes. That doesn't mean that all funds are a sham.
Suppose you wanted to invest in the FTSE100. You could go out and buy a little piece of each of 100 different companies in the correct proportions. However that comes with several downsides. You would pay 100 charges to buy (and eventually sell), and it would take a lot of your time to constantly rebalance by buying and selling more shares to keep the proportions in line with the index. So, instead, you purchase an index fund. The fund manager does all the work for you in exchange for a modest annual fee. Funds are a necessary and useful element of investing.
If a fund manager says to you "don't buy the index. I can beat the index" then it's a sham. He can't beat the index. He just wants your fee. Active funds make their money by collecting your fee, not by investing money well. If they were that good at investing, they would borrow money, invest it, and live off the gains - they wouldn't need your money at all. But they know that markets are hard to predict, and they can't be sure of making any gains. So they advertise cleverly, and live off your fees whether they make any gains or not.
If someone tells you they can beat an index, there is a very high probability that they won't. But you will pay them 1% instead of 0.2% for their trouble. Watching the TV yesterday, first reports for 2025 are in: 70% of active funds failed to beat their index last year. Over the long term that proportion will rise to over 90%. You are paying them fees for nothing.
If you want Growth or Value or Asia  or Small Cap  there are index funds available for all of those. Don't pay extra fees for active managers who will not do any better than the index.

An interesting side question here is - what would happen though, if everyone in the world all believed this and everyone just bought index funds and nothing else?

I am pretty sure something would go very wrong but I'm not sure how!  

If everyone did this then index increases / decreases would be entirely dependant on inflows / outflows of capital. It would entrench the current relative valuations of all listed companies which would remove any incentive for them to compete in a sensible manner. It would effectively end capitalism.

Obviously this is not going to happen.

It does beg the question though as to the relation between what an individual should do and what the 'market' (which comprises those individuals) should do. All the evidence is that investment managers cannot beat the market over time once fees are taken into account which is the whole ethos behind index trackers. But when you buy an index tracker you are making an active decision to invest your cash in individual companies using no other criteria than their relative valuations. Which is why I object to the term "passive" - it's an active decision. "Low cost" is more accurate. But why on earth should you buy company A over company B just because A was valued higher than B? Or put more into company C just because it was worth more than D? Of all the possible investment criteria this is just about the dumbest imaginable other than throwing darts. It's made worse when people decide to cash out because they are now selling A rather than B or more of C than D for exaclty the same reasons they bought them in the first place! Either the buy or sell criteria has to be wrong and, in reality, both are pretty dumb. The sole reason for buying a tracker is that it is a low cost way of riding on the backs of active investors - and the more people who use it, the more the very concept breaks down.

As an example, at some point the AI bubble may burst. In theory, that shouldn't hurt the overall market too much as most of the actual money invested in AI is from the cash piles that Alphabet, Meta, Apple, etc have grown over the years (along with cross-investments by Nvidia - basically paying these companies to buy yet more Nvidia chips...). If these investments end up next to worthless then the value of these companies should fall by a lot but it would have very little impact on the overall economy. Indeed, the building of all these possibly useless datacenters could be considered a private finance Keynesian-like injection of cash into the economy and better build useless datacenters than destroy capital in a war. But thanks to index trackers, when the "magnificent 7" crash we'll see other companies hit just because people are withdrawing cash from trackers - and those withdrawals will disproportionately hurt the other companies more because by the time they happen the magnificent 7 won't be anything like as magnificent!

leosayer

I recall reading that something like 20% of the global stock market is owned by index funds so there is a long long way to go before they dominate.

Index funds don't have much impact on price discovery because they only tend to buy and sell once per day to reflect net subscriptions and redemptions of each fund. 

robatwork

Pretty much the premise of Tim Hale's Smarter Investing. 

No "fund picking" manager ever beats the market ie. a zero cost tracker. And even the fund manager superstars around when TH was writing his first few editions haven't managed it. Neil Woodford springs to mind -  his fund imploded particularly spectacularly after 25 years of notable success. I invested a small speculative amount in his fund around 2015, and got out just as it was about to go bust.