IBloomberg suggests index funds can create overvalue feedback loop.

[Ourayaway]

Possible concern regarding index investing as more people switch to passive investing a la indexing.

Gist of the article is that S&P 500 index funds overvalues large cap companies while undervaluing smaller and med cap firms. As more investors start using index funds those valuations get more distorted over time.

I think a real example recently was Tesla getting added to S&P 500 and as a result index funds had to include it causing a run up in its stock price some consider outsize for its revenue.


https://www.bloomberg.com/news/articles/2021-01-13/trillions-of-dollars-in-index-funds-are-distorting-the-s-p-500

[bacchi]

They should've waited a year. SC stocks (RUT, IJR, etc) have outpaced the S&P since early November.

Megacaps may be going out of style.

[Psychstache]

Possible concern regarding index investing as more people switch to passive investing a la indexing.

Gist of the article is that S&P 500 index funds overvalues large cap companies while undervaluing smaller and med cap firms. As more investors start using index funds those valuations get more distorted over time.

I think a real example recently was Tesla getting added to S&P 500 and as a result index funds had to include it causing a run up in its stock price some consider outsize for its revenue.


https://www.bloomberg.com/news/articles/2021-01-13/trillions-of-dollars-in-index-funds-are-distorting-the-s-p-500

I think there will always be enough people who think highly enough of their skills that we will have enough active traders to address this issue over the long term. In the short term, sometimes issues like the Tesla example will crop up, but I think the issue is self-correcting thanks to greed and hubris (and those aren't going anywhere).