Indexing Fuss Unwarranted

Passive investing has been ridiculed by Wall Street for decades. The following list is just a small sample of the criticisms I’ve collected over the years:

• Sanford C. Bernstein & Co. strategist Inigo Fraser-Jenkins called it worse than Marxism.
• David Smith, fund manager at Hargreaves Lansdown, called passive investors parasites on the financial system.
• Tim O’Neill, global co-head of Goldman Sachs’ investment management division, warned investors that if passive investing gets too big, the market won't function.

The common theme is that indexing (and passive investing in general) has become such a force that the market’s price discovery function is no longer working properly. Goldman Sachs’ O’Neill has even called passive investing a “potential bubble machine.”

Given the number of questions I get from investors about this issue, one would think that passive investing is now dominating markets. Let’s see if there’s any truth to such beliefs, and whether there’s anything to worry about.