Marko Grecs @emge2116: "🔷 𝙃𝙤𝙬 𝙥𝙖𝙨𝙨𝙞𝙫𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙘𝙝𝙖𝙣𝙜𝙚𝙙..."

Slovenia

🔷 𝙃𝙤𝙬 𝙥𝙖𝙨𝙨𝙞𝙫𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙘𝙝𝙖𝙣𝙜𝙚𝙙 𝙢𝙖𝙧𝙠𝙚𝙩 𝙨𝙩𝙧𝙪𝙘𝙩𝙪𝙧𝙚 🔷 Passive investing started as a simple idea. In many cases, it even outperforms active managers over the long periods of time, especially after fees. So instead of trying to beat the market, why not just buy the market itself? For decades, this was considered almost boring advice. Today, it has become one of the most powerful forces in global finance. What began as a low-cost investing strategy quietly evolved into something much bigger: a structural change in how capital flows through markets. ➤ The rise of passive capital There are advantages of passive investing, such as low fees, large diversification and almost no effort. As a result, many individual buyers entered investment world with trillions of dollars moved into index funds and ETFs over the past two decades. Before that, investing seemed very complicated for an individual and stock prices were mostly driven by active investors making company-specific decisions, with analyzing balance sheets, evaluating management teams and estimating future cash flows. Passive investing is something totally different. No questions are asked about whether company is overvalued, whether management is competent and whether growth is sustainable. It simply buys whatever is in the index based on weighting. This distinction matters more than most people realize. ➤ Markets became increasingly momentum-driven Most major indexes are market-cap weighted, which means the bigger a company becomes, the larger its weight in the index. And because passive inflows continuously buy the index, larger companies mechanically receive larger portions of new capital, which creates a feedback loop: Higher stock price ➡︎ larger index weight ➡︎ more passive inflows ➡︎ higher stock price. Passive flows can amplify trends far beyond what traditional valuation models would justify in the short term. This partially explains why mega-cap technology companies became so dominant. The largest firms attracted not only investor enthusiasm, but also structural buying pressure from passive capital. ➤ Price discovery changed Markets work by investors analyzing information differently and placing competing bets on what assets are worth, which determines prices. But passive investing contributes little to this process because it largely ignores valuation. Ironically, passive investing only works efficiently because active investors still exist. Active managers do the difficult work of analyzing companies and setting prices, while passive investors benefit from that work at low cost. As passive investing keeps growing and active investing declines, an important question emerges: What happens to markets, if no one cares about prices anymore? ➤ Correlations increased One side effect of index-driven investing is that stocks increasingly move together. When investors buy or sell ETFs, they are often trading entire baskets of companies simultaneously. As a result, individual businesses can become more correlated with the broader market regardless of company-specific fundamentals. A strong company may decline simply because investors are selling the index and a weak company may rise simply because it belongs to a heavily bought sector. In many ways, markets became less about individual businesses and more about exposure to themes like AI, growth, tech, energy, emerging markets, risk-on vs risk off, etc. ➤ Mega-cap dominance Passive investing also reinforced concentration. Today, a small number of companies represent a huge share of major indexes. Investors buying “diversified” index funds are often making concentrated bets on a handful of mega-cap firms. When those companies perform well, passive investing looks brilliant. But when market leadership narrows too much, vulnerability quietly increases and many investors don’t fully understand the exposure they actually own. ➤ Liquidity looks abundant until it isn’t Passive investing works extremely well during stable or rising markets, but market structure tends to reveal itself during stress. ETFs create the appearance of deep liquidity while underlying assets may be far less liquid during crises. Under normal conditions, this mismatch is manageable. Under panic conditions, correlations rise sharply and liquidity can disappear faster than expected, when everyone tries to exit at the same time. ➤ The Bigger Question The bigger question is whether markets built increasingly around automatic flows become more fragile, concentrated, momentum-driven and less connected to fundamentals in the short-term. If passive investing continues to grow, markets may become increasingly driven by allocation systems buying entire baskets automatically, rather than traditional price discovery. And over time, that could become one of the most important structural changes in modern financial history. $SPX500

Not investment advice. The author may have financial interests in the mentioned instruments.

1 Mentioned

SPX500

SPX500 Index (Non Expiry)

Strictly Necessary Cookies

Performance Cookies

Functional Cookies

Targeting Cookies