How much passive investing is too much?
- Robin Powell
- 45 minutes ago
- 7 min read
Ask how much passive is too much and you have already assumed there is a number: a share of the market at which prices stop carrying useful information. An essay newly published in the Financial Analysts Journal argues that no such number exists short of complete passive ownership, and that the passive share is the wrong thing to be counting.
Warnings that index funds have broken the stock market share a common structure. Passive investing has grown too big, price discovery has been degraded, and at some point something will give. What the warnings almost never contain is a figure. If there is a level of passive ownership at which a market stops working — if there is an answer to how much passive is too much — nobody making the argument says what it is.
Owen Lamont has offered a direct answer: there is no such number. In an essay first released by Acadian Asset Management in February 2024 and revised in June for the Financial Analysts Journal, he argues that the passive share is not the thing that determines whether a market works. Lamont is a senior vice president and portfolio manager at Acadian, which he joined in 2023 after more than 20 years in asset management and, before that, teaching finance at Harvard, Chicago Booth and Yale.
That is a narrower claim than it first sounds, and it is worth separating from a broader one. Lamont is not arguing that passive investing leaves prices untouched. He is arguing that no percentage of passive ownership, on its own, tells you when price discovery stops working.
Why 'how much passive is too much' has no answer
Prices stay informative only if enough investors are willing and able to trade on good information. How many such investors there are, how much capital they control, whether their incentives reward being right, whether anything prevents them acting — these are the variables that matter. Add a liquid market with several types of trader interacting in it, and prices remain informative whether passive accounts for 1 per cent of the market or 99 per cent.
The reasoning starts from a simple point. Passive investors, for the most part, do not trade. A fund tracking the S&P 500 buys what the index tells it to buy, in the proportions specified, and forms no view on whether any of it is expensive. Lamont describes passive investors as the audience in a play: they sit and watch the activity on stage. Prices are set by the people doing the acting.
The growth itself is not in dispute. Passive funds held 0.44 per cent of the US stock market in 1993 and 16 per cent by 2021, according to Investment Company Institute data cited by Hao Jiang, Dimitri Vayanos and Lu Zheng. On the broader definition used by Alex Chinco and Marco Sammon, which counts internally indexed institutional portfolios and closet indexers alongside index funds, the 2021 share was 33.3 per cent — twice the ICI figure for the same year, and a reminder that even the size of the passive share is contested.
The thought experiment at the centre of the argument
Lamont makes the point concrete by setting out two countries.
The first is poor and technologically backward. It has a population of 200 million, GDP per capita of $5,000 and a stock market worth $100bn, and indexing there is banned outright. The second is rich and advanced, with 332 million people, GDP per capita of $76,000 and a market capitalisation of $36trn, of which 99.7 per cent is held passively. On the standard framing, the first ought to have the healthier market: every dollar in it is actively deployed and every price reflects somebody's judgement. The second sounds like the scenario the warnings describe.
Both countries are the United States. The first is 1970, the second 2024. And because the 0.3 per cent that is not held passively amounts to $100bn, both contain the same amount of money that has to be held by active investors.
Price-discovery capacity, on this reading, is measured in active dollars rather than in the passive share of a pie chart. Lamont concedes the comparison is unfair — different countries, different market capitalisations, no adjustment for inflation — and argues the objection strengthens his point: the market with almost no active share by percentage carries as much active capital in absolute terms as the one where indexing was banned.
What the strongest counter-argument shows, and where it stops
The most serious case against this position is not a warning but a paper. Hao Jiang of Michigan State University, Dimitri Vayanos of the London School of Economics and Lu Zheng of the University of California, Irvine published 'Passive investing and the rise of mega-firms' in the Review of Financial Studies in 2025. They found that flows into passive funds raise the prices of the largest companies most.
The empirical work covers 99 quarters, from the second quarter of 1996 to the fourth quarter of 2020, measuring flows into index funds and ETFs tracking the S&P 500 as a share of the index's market capitalisation. The effect falls away steadily down the index: a one-standard-deviation increase in passive flows is associated with a quarterly excess return over the index of 0.687 per cent for the largest 10 firms, but 0.145 per cent for the largest 200. Run on the S&P 600, an index of small companies, the same analysis found nothing statistically significant.
Compounded across the sample, the authors calculate that the growth of passive investing caused a firm continuously ranked in the top 50 of the S&P 500 to rise 29 per cent more than the index.
They are careful about what that figure does and does not establish. It is larger than their own calibrated model produces, which generates differences of between zero and four per cent — a gap they put down partly to there being fewer genuinely active investors than the model assumes, and partly to the estimate capturing an effect measured alongside the flows, which can later unwind. It applies to a hypothetical firm continuously in the top 50, not to any particular company. And the sample ends in 2020, before the rise in index concentration that prompted most of the current unease.
Lamont's answer concerns relative prices rather than the level of the market. Money going into an S&P 500 tracker buys the same percentage of the shares outstanding in Nvidia as in McDonald's, each in proportion to its float-adjusted weight, so both would be expected to rise by the same percentage. Whatever moved one against the other was non-passive investors trading with each other.
That answers a narrower question than Jiang and his co-authors ask, and leaves their finding standing. But the two positions are less far apart than they look. Passive flows can move prices without there being a share of passive ownership at which price discovery fails — and it is the second claim the warnings depend on.
The prediction the models make, and what happened
Lamont reviews the competing theoretical models, from Gârleanu and Pedersen to Bond and GarcÃa, and concludes that they disagree. Depending on which is chosen, passive investing improves relative pricing, worsens it, or does nothing at all.
What several share is a testable implication: if passive investing thins the field, the informed active investors left in it should find the competition easier. Lamont observes that this has not happened in recent years.
The longest-running record of that is the SPIVA scorecard series, published by S&P Dow Jones Indices — an index provider with a commercial interest in indexing, which is worth saying plainly, though the methodology corrects for survivorship bias and the fund data comes from Morningstar. In 2025, 79 per cent of active large-cap US equity funds underperformed the S&P 500, against 65 per cent in 2024, making it the fourth-worst year for the category in the scorecard's 25-year history. S&P DJI's explanation is that the largest US stocks ran so far ahead of the rest that managers gained little from the wider spread of returns that would normally help them. British funds did worse: across the three UK equity categories, 90 per cent of funds failed to beat their benchmarks, rising to 97 per cent among small-cap funds.
A single year proves little, and 2025 was an unusually poor one. At the halfway point only 54 per cent of US large-cap funds were behind, which S&P DJI thought put the industry on course for its best showing since 2022. The longer record is what bears on Lamont's point, and there the pattern is consistency rather than improvement. In every regional scorecard published for year-end 2025, from the United States and Europe to Japan, Canada and Latin America, a substantial majority of funds in almost every category underperformed over 10 or 15 years — a pattern TEBI has tracked across successive scorecards. Reviewing the UK results, S&P DJI noted that its scorecards keep documenting the same thing year after year, in markets across the world.
The improvement several of the models predicted has not arrived.
The explanation that fits better
Lamont puts two explanations side by side for a strategy that has stopped working. Blaming indexing is the explanation Terry Smith has offered for his own fund's underperformance. It is marginally more credible, Lamont suggests, than blaming the dog that ate one's homework, and a good deal less credible than the plainer alternative: that value investing went out of style with the investors who were actually doing the trading.
His own interest runs in the opposite direction and he makes no attempt to disguise it. He works for an active manager, names Acadian in his conclusion, and ends by arguing that a healthy market needs smart active investors, both fundamental and systematic. The case he is making is against a particular explanation for active management's difficulties, not for indexing.
Which leaves the threshold question some distance from where it started. 'How much passive is too much' assumes the answer lies in the size of the passive share. Nothing in the research says passive flows leave prices untouched, and the best of it says the opposite. What none of it supplies is the number. On Lamont's account there was never going to be one, because the quantity that matters is not the passive share but the quality of whoever is still trading — and that is not something anyone has been counting.
Resources
Chinco, A., & Sammon, M. (2024). The passive-ownership share is double what you think it is. Journal of Financial Economics, 157, Article 103860.
Jiang, H., Vayanos, D., & Zheng, L. (2025). Passive investing and the rise of mega-firms. The Review of Financial Studies, 38(12), 3461–3496.
Lamont, O. A. (2026). Don't blame indexing for your problems. Financial Analysts Journal, 82(3).
S&P Dow Jones Indices. (2026). SPIVA Europe scorecard: Year-end 2025.
S&P Dow Jones Indices. (2026). SPIVA U.S. scorecard: Year-end 2025.
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How to Fund the Life You Want, by TEBI editor Robin Powell and Jonathan Hollow, covers this ground at book length for a UK audience. Bloomsbury published the second edition. Buy it on Amazon.