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What if everybody indexed?

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As a financial advisor, I receive several emails each day from mutual fund companies, insurance companies, etc. I got one today from MFS that included this provocative (to me) quote attributed to John C. Bogle, founder of The Vanguard Group: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.” As MFS offers actively managed mutual funds, I find this marketing tactic amusing. This email is supposed to compel me to register for a WebEx to learn “what everybody is missing about the active/passive debate”.

I have not done business with MFS for many years, but may tune in to the WebEx with the hopes of learning something. In the mean time Cullen – what do you think about Bogle’s statement? (I know you have commented on similar concerns expressed by other “experts”, but don’t recall if you mentioned Bogle’s comment specifically.)

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Posted by Steve W
Posted on 09/20/2017 3:51 PM
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Cullen has talked about this before. It is impossible for “everyone” to index. Indexers rely on more active investors like market makers and arbitrageurs to create liquidity so they can buy/sell and rebalance.

Bogle is kind of dumb when it comes to some macro concepts. Aside from the fact that fees are important I don’t think he has a very good grasp of a lot of these ideas.

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Posted by VG
Answered on 09/20/2017 7:18 PM
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    I wrote about this a while back. Indexing requires a good bit of active management. So the short answer is that if everyone indexed then there would be that much more active management in the form of market makers and arbitrageurs. Indexing doesn’t make active management disappear. It just changes the way it looks.

    https://www.pragcap.com/what-if-everyone-indexed/

    https://www.pragcap.com/is-indexing-going-to-eat-the-financial-markets/

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    Cullen Roche Posted by Cullen Roche
    Answered on 09/25/2017 7:10 PM
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