Index funds go mainstream, raising questions about potential market impacts
-
Index funds have become incredibly popular due to their low costs and consistent outperformance compared to actively managed funds. Their assets now exceed active funds.
-
In theory, if index funds captured 100% of the market, there could be negative impacts - less price discovery, especially for IPOs, and potential market freezes.
-
However, it's unlikely index funds will ever dominate so fully. As they grow, profit opportunities for active trading and arbitrage will also attract more investors.
-
Index funds remain a smart choice for retirement savings - they offer stability, diversification, and lower fees compared to active management.
-
As index funds grow, nimble active investors willing to research and trade on individual securities can profit from pricing discrepancies and information sluggishness.