Stock market prices are being distorted by the proliferation of index investing, which is likely to unwind in an ugly way, according to experts.
The topic on the future of indexing came up during the DoubleLine Capital inaugural Roundtable Prime hosted by CEO Jeffery Gundlach. Gundlach noted that the indexation of equities is “the definition of momentum investing”.
“When it comes to indexing, it’s remarkable how the pendulum swings,” said Gundlach, adding that in the 1990s, people sought active management for equities whereas these days people want indexing for their stocks.
Investopedia describes index investing as a passive investment strategy that attempts to generate returns similar to a broad market index.
Although some have raised the question of whether there is enough underlying liquidity in the stock markets, there has been a rotation out of actively managed funds into passively managed indexed equity funds and exchange-traded funds (ETFs).
“You can’t have something that ostensibly is liquid on the surface and yet invest in the yield illiquid. That’s ETFs and other index funds, they’re investing in, particularly in the illiquid,” said Stephen Romick, a portfolio manager with First Pacific Advisors.
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