Has Passive Investing Gotten Too Big?

The growing market share of passive investments has been a continuing theme in the fund industry over the past few decades. Passive funds are often thought of as mutual funds or exchange-traded funds (ETFs) that track a periodically rebalanced, market-capitalization-weighted index.

In August 1996, 20 years after the launch of the first publicly available index fund, passive funds represented only 6% of U.S.-domiciled equity mutual fund and ETF assets. Active, non-index tracking funds held 94%. As of the end of May 2024, passive mutual funds and ETF assets have grown to nearly 60% of the equity fund market.

Figures such as these, along with the common perception that all passive investors are buying and holding the market and thereby no longer actively trading in stocks, have brought about questions about the potential impact passive investing may have on market prices. Periods when a subset of companies rise rapidly in price and valuations, such as the Magnificent 7 stocks of late, may also contribute to investor curiosity. Some claim that perhaps more money flowing into index funds that hold these companies is the driving force for the dramatic price increases in those few mega-cap companies with very high prices.