Challenges of Passive Investing

Passive investing has garnered significant attention as it approaches a dominant share of the market, leading to concerns about its implications on market structure. Critics suggest that passive strategies, particularly index funds, alter how assets are priced, as they rely on set formulas rather than active decision-making based on company fundamentals. This dynamic could lead to increased volatility and interconnected risks, especially during market turbulence. As more capital flows into passive vehicles, they may diminish opportunities for active management, potentially skewing price discovery and market efficiency.