The Line We Can't Cross | Mike Green on the Passive Investing Endgame

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Jan 20, 2026

Join Mike Green, Chief Investment Strategist at Simplify Asset Management, as he unpacks the complexities of passive investing. He reveals why index funds aren't truly passive and discusses the inelastic market hypothesis, showing how daily flows can dramatically affect prices. Green highlights the growing dominance of passive investments and the potential instability this creates in markets. He also shares insights on the impact of demographic shifts and AI on capital investments, raising crucial questions for future investors.

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INSIGHT

Passive Funds Are Systematic Traders

Index funds transact continuously due to inflows, outflows, and reconstitutions rather than 'never transacting'.
That means passive funds behave like systematic trading algorithms and can move prices daily.

INSIGHT

Markets Have Become Materially Inelastic

The inelastic market hypothesis shows markets absorb flows far less elastically than EMH assumes, magnifying price impact.
Recent work finds a dollar into the market moves market cap multiple times more than the penny EMH predicts.

INSIGHT

A Theoretical Passive-Dominance Limit Exists

A theoretical outer-limit shows around 75–83% passive ownership would break market functioning absent rule changes.
Mike estimates current passive share near 54% and rising ~4% last year, implying risk if trends continue.

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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