Will Passives Become Too Popular?

LOW COST FUNDS: At what point will passive funds become so dominant that market inefficiencies arise, allowing more active fund managers to add value?

Hortense Bioy, CFA 8 August, 2014 | 9:24AM

I’ve twice been asked an interesting, yet puzzling, question about the rise of passive investing in the past few weeks.

Given the growing popularity of passive investment products, such as exchange-traded funds and index trackers, at what point will they become so dominant that market inefficiencies arise, allowing more active fund managers to add value?

I think this is a theoretical question to which there is no honest answer. For starters, an answer would imply that financial markets are fully efficient and stocks have a fundamental value to which they always revert, but this is not the case. A valuation is just an opinion; the price a buyer is willing to pay and a seller is willing to receive.

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About Author

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive funds and sustainability research in Europe for Morningstar

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