3 Popular Arguments Against Index Funds

Index funds are bad. Worse still, they are now called a mindless fad too. It begs the question why active management are against index funds.

This is because since 2009, investors have poured $1.1 trillion into stock index funds. They’ve also taken out $257 billion from actively managed stock portfolios.

So, is it a case of ‘sour grapes’? Let’s find out. That said, here are 3 popular arguments against index funds:

1: Stock Picker’s Market Now

Just in the first quarter of 2015, diversified stock funds gained 2.6%. The S&P 500 index gained 0.95% during the same time period. That said, less than 25% of blue-chip funds beat their index over the past ten years or so.

2: Fine but Wait Until a Bear’s Market Strikes

Active managers should do better in a down market. This is because index funds must hold all stocks whether in a good or bad market. In the 2008 bear market, most active managers fell below their bogey. Of course, they did better during the dotcom bust. This was because they could hide in cheaper value-oriented and small-cap stocks. Now, even traditional value stocks are pricey. In other words, there is no place for active managers to hide now.

3: When Indexing Gets Popular, Active Funding Will Win

It’s hard to beat the market. Whenever you bet on a stock, there’s always another trader on the side. In the case where everyone indexes, there might be less ‘smart money’ in the market to match your wits against. This will make it easier to find opportunities in mispriced stocks. We’re still a long way away from this situation. This is because only 15% of money are in a variety of U.S funds. That said, even if active funds began to beat the market, you will find both smart and dumb money coming in from those strategies. At that point, the odds will shift in favor of indexers.