John Bogle: Warning for index fund investors.

John Bogle has a warning for index fund investors

 

i hold VAS ( ASX top 300 or XKO )( a top 20 holding ) and QFN ( the XFJ index )

and while they are not the major part of my holdings i use them as an ' insurance ' against my poor stock selection in those indexes .

to understand index ETFs ( and passive index funds ) one must study the documentation carefully ( they are neither plain nor simple )

the aim is to track that particular index ( for better or worse ) BUT how they track it can increase the moves of the index if , say CBA loses it's weighting power in the indexes do the funds reduce ( sell down ) CBA to mimic the weighting ... as is the extra selling likely to put extra downward pressure on the CBA share price ( and the reverse if a stock , like say BKL starts to gain importance in that index ).

these index funds ( and ETFs ) can be useful , but may not be the total solution ( and could even be part of the disaster )

i also hold BKL ( but not CBA directly , only via LICs and ETFs )


PS i also DRP VAS ( bought in 2011 ) and QFN ( bought late in 2012 )

and that DRP decision might be the pivotal edge ( especially in VAS which pays quarterly )

 

CBA's portfolio weighting in VAS is only around 8.5%. I can't really see its weighting dropping by more than 1-2%. Having said that the big 4's total weighting is around 26.5%.

 

but that reduction in CBA is likely to happen at the same time as the market is falling heavily

use MVW ( as an example ) it re-balances every two months , will VAS ( and similar ETs ) try to track the market closely ( and offer off-market redemptions to the parallel institutional funds )

so say CBA ( is only an example , they could be reducing ten or more stocks in a big market dip )

so you have short-sellers busy having fun , the ETF fund managers reducing , but who is buying ??? ( until the short-sellers buy to replace the borrowed shares )

remember if the dip looks big enough some investors would be tempted to ' flip ( sell already held shares and buy back much cheaper )


MOST RECENT SHORT SALES
Data graphed above represents aggregate short sales, provided by ASIC with a lag of 4 trading days (T+4). The ASX releases non-aggregated daily short sales figures which can be used as an indication of short sales activity within this 4 day window. These figures are released by the ASX daily and cover the previous days activity. This activity is listed in the table below, and is usually updated at 11:30am Sydney time. The table includes the most recent 20 ASX short sales updates for this stock. Alert symbols indicate the stock has been shorted more than 0.5% on the day.

Date Gross shorts 1 Issued capital % Capital shorted 2 Trade volume 3 Shorts as % of volume
Mon 30th Oct, 2017 581,701 1,752,728,198 0.03% 1,583,550 36.73%
Fri 27th Oct, 2017 1,162,028 1,752,728,198 0.06% 4,046,736 28.72%
Thu 26th Oct, 2017 930,810 1,752,728,198 0.05% 1,888,357 49.29%
Wed 25th Oct, 2017 496,876 1,752,728,198 0.02% 1,349,818 36.81%
Tue 24th Oct, 2017 283,376 1,752,728,198 0.01% 1,087,392 26.06%
Mon 23rd Oct, 2017 493,868 1,752,728,198 0.02% 1,124,051 43.94%
Fri 20th Oct, 2017 541,863 1,752,728,198 0.03% 1,439,286 37.65%
Thu 19th Oct, 2017 870,878 1,752,728,198 0.05% 1,972,332 44.15%
Wed 18th Oct, 2017 510,635 1,752,728,198 0.02% 1,611,455 31.69%
Tue 17th Oct, 2017 1,035,418 1,752,728,198 0.05% 3,051,278 33.93%
Mon 16th Oct, 2017 597,589 1,752,728,198 0.03% 2,349,172 25.44%
Fri 13th Oct, 2017 465,927 1,752,728,198 0.02% 1,728,054 26.96%
Thu 12th Oct, 2017 605,061 1,752,728,198 0.03% 1,863,391 32.47%
Wed 11th Oct, 2017 838,169 1,752,728,198 0.04% 1,282,525 65.35%
Tue 10th Oct, 2017 463,405 1,752,728,198 0.02% 1,121,532 41.32%
Mon 9th Oct, 2017 624,739 1,752,728,198 0.03% 1,431,952 43.63%
Fri 6th Oct, 2017 741,270 1,752,728,198 0.04% 2,206,187 33.60%
Thu 5th Oct, 2017 608,537 1,752,728,198 0.03% 1,206,916 50.42%
Wed 4th Oct, 2017 884,952 1,752,728,198 0.05% 2,372,905 37.29%
Tue 3rd Oct, 2017 762,478 1,731,955,765 0.04% 2,727,365 27.96%

ShortMan - Short position graph for CBA


and where CBA goes the rest of the index often follows , so possibly something close to a death spiral until retail investors come in the buy cheap CBA at say $60 or $50 or possibly even less if a GFC veteran


now all this has an extra optional twist .. VAS has an LVR of 70% ( on Commsec ) i don't have a margin loan , but how many do AND use index ETFs as collateral

 

I don't think Bogle is worried about too many people indexing. I didn't get the impression he was from that article or interviews he has given. It should be obvious that if everyone indexed the market would fall apart.

 

but like all 'good things ' too much can cause issues of it's own

i am not against index funds as a long term hold ( ideally 10 years plus )

but how many in the next downturn , will find the courage to buy more as the index ( and fund ) tries to find a solid bottom ( and not panic sell to reduce debt elsewhere , or chase individual opportunities )

i see index funds in the same light as BKI ( i hold ) and MLT ( i don't hold ) not trying to look super clever but working hard to avoid a total loss of investment capital and using the inflation v. time ratio to good advantage .

Bogle is old ( older than me ) say, he took a stake in his own fund in 2000 ( most likely before that ) he is looking very comfortable and may even be without duress in the next market meltdown .

however just like me gloating on my 2011 choices that was then and many readers are looking to start their investment strategy now ( when the XJO is nearly 2000 points above the 2011 lows .)

is index funds ( with a 20 year target ) the correct major play for them this week ... i think NOT , but now is a great time to start researching and watching them .. ready for a careful dabble in the next downturn

should there be a major downturn i will be looking at ILC and VLC as high priority targets ( i hold neither currently , preferring to stock-pick )