The End of Indexing? Six Trends that Threaten Passive Investing

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The following is excerpted from the book, The End of Indexing?, which is available from the link on this page.

“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said”. Alan Greenspan.

Index-tracking is undoubtedly the flavor of the day. Its share of total dollar volume is now in the neighbourhood of one-third of the total U.S. mutual fund market – a market share that continues to grow almost exponentially, and informed sources expect index-tracking mutual funds to have captured more than half of total funds under management within a handful of years1.

With that growth rate in mind, why on earth do I believe the end of indexing is nigh? Well, admittedly, the title for this book was chosen to provoke slightly, but only slightly. Of course, I don’t expect index-investing to disappear altogether. For many years to come, index funds will remain part of the menu investors can select from when making their investments; however, I firmly believe investors will soon begin to realise that the investment environment we are entering is entirely unsuitable for index-tracking strategies, and that they will begin to exit what they have all piled into in recent years.

My logic is based on a combination of structural trends that I have identified over the years. I distinguish between shorter-term tactical trends, which are either cyclical or behavioural in nature, and longer-term structural trends.