Has the growth of index investing, and index-benchmarked active investing, warped markets? It’s an increasingly urgent question as passive investments’ share of total assets continues to increase. Plenty of intelligent people think that the answer is “yes.”
While flows into indexes are net-positive, as they have been virtually without a break for about three decades now, then at the margin they’ll tend to send funds to whichever stocks are the most highly valued, making no quibbles over valuation.
Any strategy that doesn’t even take valuation into account can be expected to inflate bubbles, and make markets less efficient.
John Authers 7 January 2022