One measure of U.S. technology stocks has just surpassed its dot-com bubble high, raising concerns for one widely followed strategist about unsustainable levels in U.S. stocks.

By: Evelyn Cheng
CNBC News, May 22, 2017

One measure of U.S. technology stocks has just surpassed its dot-com bubble high, raising concerns for one widely followed strategist about unsustainable levels in U.S. stocks.

The MSCI USA Growth Index, whose top three holdings are Apple, Amazon.com and Facebook, has outperformed the MSCI World Value Index so much that the ratio of their performance topped this month a high last seen during the tech bubble in 2000, Bank of America Merrill Lynch's chief investment strategist, Michael Hartnett, said in a note Monday.

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.

If passive investing creates market distortions, active managers can win big.

Challenges to the status quo—political, economic or social—always evoke strong emotions, from enthusiastic support to fierce criticism. The loudest critics often have the most to lose, even if they acknowledge some benefits of the new regime.

This clash is now unfolding over ascendant investment vehicles: index and exchange-traded funds, or ETFs. The dramatic growth of such products has been revolutionary. More investors are choosing indexing over funds managed by traditional stock pickers, known in the industry as active managers. Since 2009, U.S. index funds have seen inflows of some $1.7 trillion, compared with outflows of nearly $1 trillion for actively managed mutual funds.