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What Happens If Everyone Indexes? (Part 2)

Alex Bryan discusses some possible consequences.

Alex Bryan 26 September, 2019 | 10:15

We continue the conversation between Christine Benz, Morningstar’s director of personal finance, and Alex Bryan, Morningstar’s director of passive strategies research for North America, on the topic of the popularity of indexing.

Christine Benz: So, what's the solution [for index front running]? Assume I want to track, say, a small-cap stock index, or I want that type of exposure in my portfolio, how should I address it to not be disproportionately burned by this problem?

Alex Bryan: So, I think there's one or two solutions. Number one, you could just own a total market index, where you're kind of on both sides of these trades, and it's a wash. So, if I own something like the Vanguard Total Stock Market Index, yes, there might be some stocks that go into and out of the S&P 500 that are negatively impacted by that, but I already own them if I own the Total Market Index. So, I think that's one solution.

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About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA is the Director of Passive Fund Research with Morningstar.

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