Seeds of destruction? Funds grapple with index effect

Rapid growth fuels anxiety over passive sector’s vulnerability to frontrunning

The rise of passive, index-replicating investment funds and mandates seems unstoppable. Worldwide assets in exchange-traded funds (ETFs), most of which track indexes, hit $4 trillion in May 2017, having topped the $3 trillion mark only a year earlier.

Passive funds’ share of the money managed in US equities is now around 40%, more than double the level of a decade earlier (see figure 1).

Such inexorable growth, though, brings questions about indexing’s inherent vulnerabilities. The volumes of