Smart Money Versus Dumb Money

The growth of passive investing, that is, investing in index funds, has arisen in large part due to the growing popularity of the efficient market hypothesis. In short, it seems that outperforming the stock market is a difficult, if not impossible, task. As a result, retail investors, sometimes referred to as dumb money, have flocked to index funds. A common belief on Wall Street is that in a severe market downturn, retail investors would flee the market. The 30 percent drop in the market over the past month has been a severe downturn. But, when fund flows, which is the amount of money put into or pulled out of an investment, is examined, the two S&P 500 Index ETFs favored by individuals showed net buying, while the ETF preferred by professionals showed net selling. In other words, the professionals ran and mom and pop actually bought more. With the market up about 5 percent for today, maybe dumb money does know a little more than previously believed.