The growth of index funds and its potential destabilizing effects on financial markets is investigated with Michael Green, Chief Strategist at Simplify Asset Management. Green argues that the increasing proportion of valuation-insensitive market participants due to index funds reduces market elasticity, heightening fragility. This inelasticity can lead to exacerbated price movements, both upward and downward, in response to relatively small changes in supply and demand. The XIV trade is discussed as an example of how markets can misprice risk due to this reduced elasticity. Green suggests that the current market structure, driven by passive investing, may lead to a significant market correction, akin to the Chinese stock market crash in 2015, but advises individual investors to continue with index fund investments.
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