Passive share of trading volume

In this episode of Excess Returns, we sit down with Mike Green of Simplify Asset Management for a deep dive into how passive investing has reshaped market structure, altered price discovery, and created new sources of systemic risk beneath the surface of today’s equity markets. Mike explains why index funds are not as passive as most investors believe, how daily flows drive prices in increasingly inelastic markets, and why the growth of passive strategies may be pushing markets toward an unstable endpoint. The conversation also explores macro implications, AI-driven capital spending, demographic shifts, and what all of this means for investors navigating the years ahead.

Topics covered

• How passive investing and ETF flows actively influence market prices

• The inelastic market hypothesis and why markets absorb flows differently than investors expect

• Why index funds no longer fit the classic definition of passive investing

• The growing share of passive ownership and what happens as it continues to rise

• Potential market instability and the theoretical limits of passive dominance

• How demographics, retirement flows, and 401k defaults affect market structure

• Critiques of arguments downplaying the impact of passive investing

• Why large-cap concentration keeps increasing despite slowing fundamentals

• Implications for active management, stock selection, and liquidity

• The role of AI, capital expenditures, and energy constraints in the macro outlook

• What rising electricity demand and infrastructure investment mean for the economy

• Housing market distortions, demographics, and long-term structural challenges

Timestamps
00:00 Introduction and why passive investing is not truly passive
03:00 The inelastic market hypothesis explained
06:00 Daily flows, index funds, and price impact
08:20 How much of the market is now passive
11:40 What happens if passive investing keeps growing
14:20 Retirement flows and demographic effects on markets
19:00 Responding to critiques of passive market impact
23:00 Liquidity, concentration, and large-cap dominance
27:00 Why market cap does not equal liquidity
33:00 Active management under pressure
38:00 Current market conditions and early-year rotations
41:50 Economic growth, GDP, and underlying volatility
43:30 AI capex, overinvestment, and market incentives
47:00 Energy, electricity demand, and long-term constraints
52:40 Housing, demographics, and policy challenges