There is little disagreement among market observers that passive investing is growing. There is also little dispute that the trend is likely to continue as a result of the rise of ETFs, investors’ focus on fees, the inconsistency of active manager outperformance, and numerous other factors. That is where the agreement ends, though. There are substantial disagreements as to if there has been an impact on the pricing of securities within the market, and if so, what that impact is.

There are two ways that some argue that the rise of passive investing is influencing the market. The first is that it has been a significant source of fuel behind the market and has caused it to go up more than it otherwise would have. The second is that it is impacting the relative pricing of stocks within the market and is benefitting the largest stocks that have the highest weights in market cap weighted indexes relative to all other stocks.

In this episode, we discuss both of these and try to summarize the arguments both for and against the conclusion that passive investing is distorting the market. 

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Excess Returns is an investing podcast hosted by Jack Forehand (@practicalquant) and Justin Carbonneau (@jjcarbonneau), partners at Validea. Justin and Jack discuss a wide range of investing topics including factor investing, value investing, momentum investing, multi-factor investing, trend following, market valuation and more with the goal of helping those who watch and listen become better long term investors.

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