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A tracker fund bubble?

It's possible, in theory, for tracker funds to so dominate the market that they underperform active funds. But we're not yet at this point
A tracker fund bubble?

Has the demand for tracker funds gone too far? Certainly, history warns us that investment fashions can end nastily. Think of small caps booming in the 1980s only to suffer a decade of underperformance in the 1990s, or the tech boom and bust, or the mania for credit derivatives in the 2000s that led to the banking crisis.

And there is a reason to suspect that there might come a time when tracker funds should underperform active ones.

Andrew Lo at MIT has proposed a nice analogy to explain why. Investment strategies, he says, work like population cycles in biology. If a species becomes abundant, it depletes its food source, which causes the species to decline. That eventually allows the food source to grow back, which allows species numbers to recover.

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