The explosive growth in passive trading, a fear of missing out, and a blind faith in “celebrity CEOs” have contributed to froth in high growth tech names, according to Harvard lecturer and renowned writer Vikram Mansharamani.
Now, the author who made a name spotting market bubbles in his book “Boombustology: Spotting Financial Bubbles Before They Burst,” says another one may be about to pop.
“I believe a passive investing bubble has been brewing and may, in fact, have started showing some signs of cracking and bursting here,” Mansharamani said, speaking on Yahoo Finance’s Future of Finance. “We’ve had flows driving prices, more than fundamentals in many sectors. And part of that’s being driven by just the massive amounts of money flowing into some of these indexes.”
Passive investing, which tracks a market-weighted index or portfolio now accounts for more than half of all U.S. publicly traded equity index funds, according to Bloomberg Intelligence. The funds have seen explosive growth in part because they charge much lower fees, by virtue of the way they are managed. But Mansharamani, who is also a lecturer at Harvard University, argues the outsized influence of passive investing has led to price distortions in stocks, with the market increasingly driven by capital flows and momentum-driven algorithms.
