Thread by @verdadcap

I am a big fan of passive investing and a lifelong Vanguard investor. But I was intrigued by Michael Burry's argument about the negative impacts of passive investing. But I wanted to test his thesis quantitatively.
bloomberg.com/news/articles/…

So I pulled down all of Vanguard's holdings, and I ran a regression on what predicted higher levels of passive ownership (as measured by Vanguard's % ownership of shares outstanding by firm). Here is the simplified output:

What this means in plain English is that we can predict with a high level of accuracy which firms will have higher passive ownership. Here are the main drivers and reasons:

1. US stocks have much higher levels of passive ownership than international stocks. 2. Larger stocks have a much higher level of passive ownership. 3. What I labeled P/E is actually E/P (sorry), so this shows that actually cheaper stocks have higher passive ownership

4. Within sectors, REITS are massively passively owned, and then all the value sectors (health care, energy, financials, materials, communication services) have significantly lower passive ownership (thus utilities, tech, and consumer stocks have higher passive ownership)

So in conclusion, Burry's thesis is mostly right empirically. Passive flows are overweight US vs. international, large vs. small, and overweight certain sectors (tech, utilities, REITs) vs. others (energy, financials). But passive does seem to favor value, which is surprising.