Howard Marks of Oaktree Capital in his latest shareholder memo addresses the consequences of index investing, quantitative investing, and artificial intelligence. In other words, he addresses the trend toward investing with minimal interference from people. He starts with a nice history of passive investing and exchange-traded funds, and then goes on to discuss his view of the implications of the two.
The vast growth of ETFs and their popularity has coincided with the market rally that began roughly nine years ago. Thus we haven’t had a meaningful chance to see how they function on the downside. Might the inclusion and overweighting in ETFs of market darlings – a source of demand that may have driven up their prices – be a source of stronger-than-average selling pressure on the darlings during a retreat? Might it push down their prices more and cause investors to turn increasingly against them and against the ETFs that hold them? We won’t know until it happens, but it’s not hard to imagine the popularity that fueled the growth of ETFs in good times working to their disadvantage in bad times.