I think there are a few good points made by Burry. When comparing across different market segments, today's climate of popular-index-funds can cause bubbles in some segments. For example, everyone and their grandmother invests in the S&P 500, whereas much fewer people are investing in the MSCI EAFE. Because of this, VOO can become over-valued relative to VEA.
I agree with this point and have wondered about it myself. I highly encourage everyone to diversify across all market segments, including the S&P 500, mid-cap, small-cap, developed markets and emerging markets. That mitigates the potential S&P-500 bubble that Burry might be warning against.
But that said, I don't think it's fair to accuse index funds of causing specific stocks to become over-valued relative to other stocks within the same index. By design, market-weighted index funds maintain the relative prices of different stocks within the same index. Ie, if a whole bunch of people sell their houses tomorrow and invest in the S&P 500, all the stocks in the index will get an equal percentage lift, and pricing ratio of GOOG to MMM will still remain consistent.
Note however, that equal-weighted indexes do not have this property. Imagine if the US government decided tomorrow that it was going to invest $10T in the stock market, using equal-weighting. This would translate to ~$20B for every stock in the S&P 500. The biggest stocks like GOOG would see an incremental boost, because $20B is still only ~2% of their market cap. Whereas the smallest stocks in the index would see their share price skyrocket because $20B would more than double their market cap.
I agree with this point and have wondered about it myself. I highly encourage everyone to diversify across all market segments, including the S&P 500, mid-cap, small-cap, developed markets and emerging markets. That mitigates the potential S&P-500 bubble that Burry might be warning against.
But that said, I don't think it's fair to accuse index funds of causing specific stocks to become over-valued relative to other stocks within the same index. By design, market-weighted index funds maintain the relative prices of different stocks within the same index. Ie, if a whole bunch of people sell their houses tomorrow and invest in the S&P 500, all the stocks in the index will get an equal percentage lift, and pricing ratio of GOOG to MMM will still remain consistent.
Note however, that equal-weighted indexes do not have this property. Imagine if the US government decided tomorrow that it was going to invest $10T in the stock market, using equal-weighting. This would translate to ~$20B for every stock in the S&P 500. The biggest stocks like GOOG would see an incremental boost, because $20B is still only ~2% of their market cap. Whereas the smallest stocks in the index would see their share price skyrocket because $20B would more than double their market cap.