Today Michael Burry explained to Bloomberg that ETFs are comparible to subprime CDOs, in that investors are buying securities that aren't backed by any real value:

Passive investing has removed price discovery from the equity markets...

... this is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis.

The S&P 500 contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks.

-> Michael Burry (https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos)

My question is: does this apply to physical ETFs (e.g. iShares CSPX) or is Burry only refering to synthetic ETFs and other derivatives?

2 Answers 2


Yes, I believe Burry's concern applies to physical ETFs as well as synthetic. The increasing popularity of passive investing via index-tracking funds means - according to Burry - that companies that form part of an index are inherently overvalued, relative to smaller companies that are not part of a major index. Consider for example the NASDAQ-100 index, which is weighted by market capitalization so that MSFT, AAPL and AMZN alone comprise 30% of the index. As money flows into index-linked funds (such as QQQ) that track this index, the fund manager necessarily invest proportionately in these companies regardless of their inherent value.

  • 3
    So to clarify: ETFs are causing the underlying asserts to become overvalued in the market, rather than the ETFs alone becoming overvalued? That is to say: if I were to trade-in my QQQ shares and manually buy all companies in the SP500, then I would be exposed to the exact same risk? Commented Sep 6, 2019 at 8:35
  • Yes, I believe that's what Burry is saying. The charts in this article show a trend of investors switching from active to passive management over the last several years. While it works it's fine, but at some point it may stop working
    – padd13ear
    Commented Sep 6, 2019 at 10:38
  • Hmm, I guess it's not such a bad thing that "just by being in the index" you're going to be valued more by investors. It's like brand image: the fundamental value of a company isn't just its income and balance sheets (that's just the result), but it's more their brand, relationships, patents, and so on. Perhaps "being part of a popular index" is part of the fundamental value of a company: it's like a 'boost' to their brand (and brand is something investors do place value on). Commented Sep 7, 2019 at 17:15
  • On a separate line of thought: doesn't the efficient market hypothesis say that if company 500 is massively overvalued compared to company 501 (the company outside of the index), then investors will flock to company 501? Or are we saying the ETFs are misguiding even the largest of institutional investors, such that ETFs are actually making the market inefficient? I understand why your layman would blindly buy into QQQ, but the majority of the money is with the people who's job it is to find value and invest professionally, ergo finding the value (company 501) and maintaining market efficiency? Commented Sep 7, 2019 at 17:20
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    If efficient market theory were really true in the real world, the 2008 CDO mess would not have happened.
    – Almo
    Commented Jan 4, 2021 at 14:59

My question is: does this apply to physical ETFs (e.g. iShares CSPX) or is Burry only referring to synthetic ETFs and other derivatives?

Metaphorically, he means all the ETFs and derivatives.

Nevertheless, I think Michael Burry simply exaggerate the topic by using the subprime-CDO metaphor.

CDO is a derivative that hides the risks with complicated structure and it is NOT a zero sum game. In fact, subprime CDO doesn't much value, because it is targeting people that are not afford to buy a house, and it also creates a property bubble, which potentially thanks to the popularity of Robert Kiyosaki "Rich dad, poor dad". That is bubbles price in one.

On the other hand, the index fund is based on the stock, and stock trading is a zero-sum game. Unlike CDO, Index stock will never fall indefinitely and it is difficult to hide a huge amount of non-collateral leverage on index stock speculation.

Ironically, for the serious investor, subprime-CDO is bad, but the stock bubble is good. Overpriced stock means there are lots of people speculating on the stock. When the bubble burst and causing panic sells, the patient investor will come in and scoop them up.

  • "stock bubble is good" is not true for literally 10s (or even 100s) of millions of investors who have fund managers working with their money or index funds. Tons of 401k and other retirement funds will be lost. I don't think it's fair to expect every single person to be well-informed about how the market works and make great decisions on picking stocks. I am Ben Rickert telling you to stop dancing.
    – Almo
    Commented Jan 5, 2021 at 15:54

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