A. The rising stock market, and the fact that index funds have beaten every variety of their active rivals, has propelled the popularity of passive index investing, but there are two rising dangers associated with the fact that index investing will take over the entire investing world -
a. Rising volatility
Imagine the extreme case, if the entire market is passive, there will be no stock market, at least no individual stocks, the market would move in lockstep when people bought or sold an index fund. Along the way, as more shares are locked up in ETFs and index funds, even small trades could cause bigger price swings for stocks.
b. Income inequality for corporate executives
A recent study has found that as index fund ownership of a company rose, the pay of top executives was more closely tied to the performance of the industry than that of their own company. The idea of pay for performance will be pushed away along with the rising popularity of passive investing.