Wondering if this could lead to an "index fund bubble". If everyone invested using index funds, markets exhibit increasingly erratic behaviour https://www.forbes.com/sites/greatspeculations/2018/09/19/ar...
(Ignoring weighting/market cap, but the point is that a lot of investing was passive anyway)
One experiences a lot less variability, bookkeeping and trading fees though.
The discussion is about the part that was not passive. It’s about passive funds replacing active fund managers, not about passive funds replacing dart-throwing retail monkeys.
As was retail investor’s selection of those active management funds.
There’s a diff between « active » investing in a hedge fund that has an AI HFT bot, and « active » investing in Fidelity’s Value Fund.
It's also common for market makers to move the market.
HFTs make their money on the difference between the bid and ask prices.
They can only exist because you're willing to sell at 10c, and I'm willing to buy at 11c. Hypothetically we could have traded directly lets say at 10.5c. So the HFTer has literally moved the market.
Buying at a higher price would tend to a higher price anchor. If I paid 11c, I wouldn't want to sell at a loss, so your 10.9c offer would be rejected, where it might have been accepted if I'd paid 10.5c.
But then ultra rational me would never buy above 12c and ultra rational you would never sell below 9c, based on current info, so irrespective of middlemen, the price would be bounded by those 2 figures.
And there isn't net buying or selling pressure so you could treat the spread as a fee in return for providing liquidity.
But yeah in practice, I think you're basically correct.
But that just goes to the point I’m making: there are varying degrees of active and passive funds. The rise of passive index funds won’t distort much of anything when funds were coming from a passive fund that tried to sell itself (and charge) as active.