I was reading an article earlier today that said passive investing is more than 50% of the market--and since most ETFs allocate by market cap, it causes a reinforcing feedback loop for market cap leaders.
I was reading an article earlier today that said passive investing is more than 50% of the market--and since most ETFs allocate by market cap, it causes a reinforcing feedback loop for market cap leaders.
Passive investing is not an issue, but the default bias towards large cap equities like SP500, Nasdaq100. Passive investing through total market ETFs (like VTI) maintains the status quo.
For example, if they are only two companies, say with 1T and 4T market cap. If one invests 5M into a total market ETF, 1M is allocated to company A and 4M to company B. But since company B is 4x bigger than company A, the upward price pressure is the same for both companies.
The money you buy stock with l goes to the former/selling shareholder, which is most often not the company. It is possible the company is holding its own stock and selling for cash, or emitting new shares for cash, but that is much much rarer.
by 'allocated', I mean allocated during the purchase decision. not that money is sent to respective company.
What is the mechanism behind that?
In a hypothetical market with 100% ETFs, you’d have a status quo.
Edit: maybe not, since you have ETFs that invest in, say, Nasdaq only, which is tech oriented and would influence S&P500.
The problem is that companies with large market cap will get more of any subsequent investment because many fund's allocate new money by current market cap.
If you ever played Risk, or most other games, once the snowball starts, it's hard to stop it.
Of course, since the market has never been like this before, it's a speculation...