Green: Passive Investing Is A Misnomer

Your Real Vision Daily Briefing for July 31, 2020

Mike Green gives an update on the passive indexation, ETF and mutual fund outflows, and why he thinks there could be some market turmoil coming.

  • Passive players are, in reality, very active market participants that have an outsized effect on share prices.
  • We’re in a bubble right now that is fueled by passive investing both on the bond side and the equity side.
  • Flow data on ETFs and mutual funds suggest that the markets could be due for some turmoil in the coming months.

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Passive players took in more than $400 billion last year and while the assumption is that they don’t transact, they’re actually very active, Mike Green of Logica Capital Advisors told Real Vision during today’s Daily Briefing.

Green said that people get seduced by the language of passive indexation and it is perceived as harmless, but “passive” is an improper label, as they are actually causing significant distortion in asset prices.

He explained that because passive assumes the last price is the right price, they’re willing to transact at any price, and by virtue of coming in they inject momentum in share prices and cause them to inflate as a result.

Green also said he thinks we’re in an extraordinary bubble right now, one that is fueled by passive investing both on the bond side and the equity side.

Overall, Green said that the dynamics of the market are tied to the flow of investments, so he is watching events like the end of the supplemental unemployment benefit and continued layoffs for cues about where we are headed. He thinks we are going to see increased layoffs of higher income individuals and we will see fund flows deteriorate as a result, making the market very vulnerable.

“I’m concerned about a significant dip in risk assets,” he said.