Are Passive Funds Creating an Index Bubble?
Over the past several years there has been a significant shift of capital out of actively managed funds and into passive funds that track indices such as the FTSE 100, FTSE All-Share or S&P 500, to name just a few. The shift has come from both institutional and individuals investing online
The arguments for passive funds are clear, especially from the point of view of a retail investor. Active fund managers haven’t consistently demonstrated the ability to beat benchmark indices and they charge handsomely for the privilege of often
However, the capital swing towards passive index investing involves some longer term danger that could end up hurting returns. Most of the biggest indices, such as the FTSE 100, S&P 500, Nasdaq etc.
The concern is that this will lead to market distortion that will have consequences for investors. The way
This growing top heaviness of indices has two clear consequences. It reduces the risk spread for investors as the biggest handful of companies increase their weighting within the index. It also leads to big companies growing in value based on their original weighting in the index rather than necessarily strong fundamentals. Capital discrimination based on the underlying quality of businesses is dropping. Ignoring
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