This vision was laid out nicely by John Authers, a Bloomberg Opinion columnist, on ETF IQ a few weeks ago:
“You probably need to move to a point where you barbell. You are either indexing or you’re absolutely not, meaning taking no interest in any benchmark. The analogy Andrew Lo at MIT makes is with dinosaurs. You have big lumbering herbivores — think ETFs or Vanguard mutual funds — that munch away at the beta and are creating these opportunities that are snapped up by the Velociraptors, who are going around arbitraging and being activist, following around companies. That is what we’re very slowly moving towards but at this point the markets ecology is incomplete.”
I basically made the same argument in this column on how active would be better — and frankly, happier — embracing a more “active” albeit supporting role in portfolios. Although they should probably act fast as many of the indexes being made are high active share, high conviction strategies — effectively beating them to the spot.
Another solution is, of course, more and better competition. Which brings us full circle to the 3.7 million indexes. Perhaps index No. 3,732,021 is going to be “the one” that cuts into the stranglehold of the S&P 500 or the MSCI Emerging Markets Index.
Thus, proliferation could actually be the antidote to concentration. And that is something that should not be feared.
This story provided by Bloomberg News.