Passive 50 years on

Published in The Sunday Times on 26th April 2026.

Investing has never been easy. But it has arguably become simpler over the years.

There was a time when people used to invest in the stock market by pooling money with other people and giving it to a professional investment manager. The manager would buy and sell stocks to try and generate a return for investors. Fees were high and funds were opaque. Buying stocks yourself was costly as trading costs were high and it was difficult and expensive to diversify.  

Indexation – buying the whole market

Then some finance academics came along and said you could just invest in the whole stock market. Buy every stock in proportion to its size (market capitalisation), and you will get the overall market’s return, less any fees. And the fees you have to pay will be much less and what you own will be much more transparent. This was quite the disaster for the active fund management industry. 

Indexation – buying specific factors

But the academics weren’t done. Some active managers were able to outperform the market and justify their fees, but when the data was put under a stronger microscope, the conclusion shifted. That outperformance, the academics concluded, wasn’t really about brilliance or insight so much as exposure to simple statistical factors. Managers were simply running with a bias — towards cheaper stocks, or smaller companies. Value managers outperformed because they owned value stocks. If you wanted “value”, you could simply tilt a portfolio towards companies with low price‑to‑book ratios and steer clear of the frothiest names at the top end. 

So, it’s been a tough time for the active fund management industry. This year marks the 50th anniversary of the launch of the first index fund, thanks to John Bogle, the founder of Vanguard. The share of assets managed actively relative to that managed passively has shrunk dramatically since then. In the US passively managed assets are larger than those managed actively since 2024. Active is still in the majority globally, but based upon flows the trend is clearly in one direction.

Investors the world over, owe a debt of gratitude to John Bogle. Investing today is, without question, a much simpler endeavour for an individual. Costs came down, diversification went up, and for most the investment journey became simpler, cheaper and more forgiving.

Passive has been unequivocally good for the individual, but not for the system

However, it’s far from clear that passive has made investing simpler for markets and institutions. Beneath the surface things have become much more complex.  

One of the legitimate criticisms levelled at passive is that free rides on the price discovery done by active. Passive investors don’t set prices. Prices are an input to passive investing, but an output of active investing. That is not a flaw — it is the point — but it means that the burden of price formation falls on a shrinking pool of active participants. 

With the decline in assets managed actively, there are fewer participants doing the analytical heavy lifting. The market plumbing is more delicate as a result. I don’t know what the tipping point is – maybe the market would function perfectly well if 99% of the assets were passive and 1% was active. But the system works until it doesn’t.  

Some have gone as far as saying passive is “worse than Marxism”. Passive investing allocates capital without judgement. Market‑cap‑weighted flows reward size rather than merit, reinforce momentum rather than fundamentals, and allow weak or speculative companies to raise capital on favourable terms simply because they sit inside an index. The significant concentration at the top of the S&P500 is often exhibit one in the case against passive.  

Passive distortions 

It is argued, that as a consequence of passive dominance the signals sent by prices can be noisier, persistence of mispricing can be longer, and the feedback loops stronger. This is a non-issue when markets are calm, but it complicates decision-making when conditions turn. 

There’s an element of he said, she said about all of this. I do share some of these concerns, but there’s no strong evidence that passive investing is the root cause of some of the complex issues stock markets face today – concentration, feedback loops and bubble-like conditions.  

What does all this mean for investors?

For the average investor, the question isn’t whether passive investing is quietly breaking capitalism. It’s what any of this means for how they should behave. 

On that score I don’t see any cause for concern. The worst fears about passive are second‑order compared to the first‑order risks most investors face: overtrading, poor timing, panic selling and performance chasing.  

Passive investing lowers the temperature. It may not eliminate mistakes, but it narrows the range of them. Fewer decisions, fewer mistakes, and better odds of an acceptable outcome. From a practical standpoint, that dwarfs any market‑structure concerns, abstract or otherwise.   

Passive investing should not be seen as an ideology – nor indeed should its factor-based cousin. I think there’s a role for active, not just in price discovery, but that’s an argument for another day. Passive investing is a tool — a very good one —not a moral position or a theory of everything.  

Markets may be complex, evolving systems. But individuals don’t need to solve for that — just learn to live with it. 

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on X at @gconno1.