> These opportunities are likely to cause an outflow from passive into active if that is where the money is.
Sure. But it's unclear where the equilibrium is between the volume of passive investing and the volume active investing (or if there is one).
In the meantime, the increasing share of passive investment is causing the prices on all these assets to become more correlated. This increases systemic risk. When everyone diversifies completely, you lose the benefits of diversification.
It's unclear to me how well investors recognize this shift in systemic risk. Obviously there will always still be some active investors. But how can you be sure that the economy won't be destabilized from this?
It not so much the economy as the market. If everyone is blinding buying s&p500 every month those stocks will continue to climb regardless of actual "value" based on fundamentals.
Sure. But it's unclear where the equilibrium is between the volume of passive investing and the volume active investing (or if there is one).
In the meantime, the increasing share of passive investment is causing the prices on all these assets to become more correlated. This increases systemic risk. When everyone diversifies completely, you lose the benefits of diversification.
It's unclear to me how well investors recognize this shift in systemic risk. Obviously there will always still be some active investors. But how can you be sure that the economy won't be destabilized from this?