Passive Aggressive: The Risks of Passive Investing Dominance

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Journal Papers

Passive Aggressive: The Risks of Passive Investing Dominance

By
Chris Brightman
,
Campbell Harvey
May 2025
Read Time: 20 min
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Abstract

Passive capitalization-weighted index funds now surpass active management in aggregate investor allocations. Flows into passive strategies cause unrelated socks to move synchronously, undermining diversification and potentially increasing systemic risk. New flows into passive products mechanically overweight overvalued stocks and underweight undervalued stocks due to market-price weighting, exacerbating momentum-driven price distortions. Rebalancing at the stock level to non-price-based anchor weights may mitigate these distortions and enhance long-term returns.

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Chris Brightman, CFA
Partner, Chief Executive Officer & Chief Investment Officer
 Campbell Harvey, PhD author picture
Campbell Harvey, PhD
Partner, Senior Advisor, Director of Research
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