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There are some finance professionals that have warned about an index fund bubble:

Index funds bubble

I'm assuming that, at some point, index funds will get into a bubble and this bubble will eventually crash.

Is there any reason to think that such crash would make the companies contained in the index go bankrupt?

If not, wouldn't the index eventually recover itself?

Would this hypothetical bubble affect equally both equity and bond indexes?

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Is there any reason to think that such crash would make the companies contained in the index go bankrupt?

Not by itself. A company doesn't care about the price of their own stock unless they're buying or selling it. If the company has enough money in their balance sheet they're not affected by their stock price.

If not, wouldn't the index eventually recover itself?

I don't understand how "recover" can ever be the right word. Bubble implies that the valuation is significantly higher than it should be. The bubble bursting would drop the valuation back to an acceptable range. Yes it would likely go back up to where it was eventually by the virtue of the stock market on average going up.

Would this hypothetical bubble affect equally both equity and bond indexes?

Bonds have a set value. The total payout of any bond you can buy is already set. The price of the bond is set by what buyers value that future money in today's money. That means bond prices tend to be fairly stable.

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    By recovery I meant that, as far as I understand, an hypothetical crash would cause panic selling, therefore the index would fall to a 'undervalued' price due to this panic. I would say that the index is 'recovered' when it reaches a price that is consistent with its underlying value. However, from your answer, I can understand the point. – Martel May 13 '20 at 16:38
  • @Martel - Value is a tricky word. IS value the current share price or is it what you perceive a company to be worth? In terms of share price, if an equity ETF trades below the NAV of its components then it is undervalued. If the market drops and the ETF accurately tracks its components, there's no arb. But is the ETF undervalued if the market believes that the component stocks are fairly valued? Will the index recover? When the economic uncertainty passes and the components begin increasing their earnings, share price will recover as will the ETF's price. – Bob Baerker May 13 '20 at 16:50
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I think what happened when the bubble bursts was in 2008. It's only a matter of time before a crash happens again. When I look at some stocks, people didn't learn from 2008.

  • The 2008 bubble was not index funds. – user253751 May 13 '20 at 19:14

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