i read somewhere when comparing a financial advisor, managing one's portfolio vs an index fund - There was no discernible higher return with the advisor managed portfolio vs the index fund.
Because everyone is doubling down on investing on the status quo, don’t be surprised if a disruption to the status quo has far more dramatic impact than it would have 20 years ago.
If the ETFs are incorrectly pricing assets because of blind buying, then an enterprising managed index fund could bet against it. Or, find some other arbitration mechanism. But of course, this doesn't actually happen, because price discovery _still happens_ even if ETFs account for a large percentage of trades (since price discovery can happen even with small number of trades).
And if ETFs is just betting on the market average, then the worst that can happen is they get average results. ETFs don't use leverage or debt.
But that's not the point here. The big money in investing isn't in beating the market, but charging fees, so fund managers only need to convince people to give them their money, they don't actually have to deliver results, provided they're working within the fund's stated goals.
If (when!) there is a correction, there will be analysis done on the cause (pick one or more of: student loan debt, sub-prime auto loans, trade war, something else) and then new investment strategies will be devised. And maybe passive investing will be shown to leave you vulnerable to a sea-change.
7.7% real return with 17.7% vol vs 7.1% real return with 17.1% vol.
Sharpe for equal weight: 0.435; Sharpe for SPY: 0.415