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Passive Investing's Volatile Side Effect: A Growing Concern

Wesley ParkSaturday, Nov 23, 2024 4:35 pm ET
2min read
In recent years, a significant trend has emerged in the stock market: the rapid growth of passive investing, particularly through low-cost index funds and ETFs. While this trend offers accessibility and simplicity, it may also be contributing to increased market risk and volatility. This article explores the impact of this trend and its potential implications for investors.

Passive investing, driven by the popularity of index funds and ETFs, has surged in recent years. According to EY's 2023 Global Wealth Research Report, 73% of respondents changed their investment behavior due to market volatility, signaling the impact of passive investing on market dynamics. This trend has been fueled by the desire for low-cost, broad market exposure, but it may also be contributing to market inefficiencies and increased volatility.

One of the key concerns with the rapid growth of passive investing is the lack of active management. Passive funds, by design, do not engage in stock-picking or timing the market. Instead, they aim to track a market index as closely as possible. While this approach reduces costs, it can also lead to a less diversified and more homogeneous portfolio composition, amplifying market swings.

Consider the 2020 GameStop short squeeze, which highlighted the risks associated with passive investing. The coordinated buying of GameStop stock by retail investors led to a massive short squeeze, causing its stock price to skyrocket and other highly correlated stocks to follow suit. This event demonstrated how passive investing, coupled with algorithmic trading, can contribute to market volatility and inefficiencies.


Another concern is the demographic shift in investors, particularly the increase in younger investors embracing passive investments and fintech. According to EY's 2023 Global Wealth Research Report, 73% of millennials plan to add a new provider or switch in the next three years, compared to 29% of boomers. This trend, driven by technology and digital platforms, may contribute to increased market risk and volatility.

To mitigate the increased risk and volatility associated with this trend, regulatory measures can be implemented. Improved disclosure and transparency, such as enhanced reporting on ETF leverage, redemption patterns, and portfolio composition, can help investors better understand potential risks. Additionally, requiring ETFs to disclose their portfolio holdings daily, aligning with the practice of mutual funds, could help increase transparency and investor confidence.

In conclusion, while passive investing offers numerous benefits, it is essential to recognize its potential risks and impacts on market volatility. As passive funds continue to grow in popularity, investors must be aware of the implications and consider a balanced portfolio approach that combines both passive and active strategies. By doing so, investors can better navigate the volatile market landscape and achieve long-term success.
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getintocollegern
11/24
$GME Timing is Key! The Swiss National Bank had a strategic reason for purchasing those shares. What was it? I believe we'll uncover the answer quite soon!
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JRshoe1997
11/24
$GME might try to limit our trading time next week to suppress the stock. They could use anything at their disposal, even halts and holidays, to prevent trading. If they do, they'll end up losing... and we'll have a green Christmas! Just a heads-up, not financial advice.
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enosia1
11/24
$GME there are currently too many bulls on this board. Expect a sell-off on Monday. It's always wise to be a contrarian.
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Puzzleheaded-Mood544
11/24
$GME GET READY FOR MASSIVE GAINS THIS WEEK! BUY AND HOLD ONTO YOUR SHARES WHILE YOU CAN!
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-Joseeey-
11/24
$GME This is a must-buy stock! Get in now before the price goes up. Expect big things from $GME this week. Don’t miss out, grab your shares while they’re still available.
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surveillance_raven
11/23
$GME if useless crypto can 5-7x. Why can't GME be 10x? Being a dumb person has its perks. Sometimes simple is best. Crypto is good, but they put in billions of dollars into them. The dollar is basically useless toilet paper now. The current price for GME has to go and will go parabolic. Trump + Elon. Nothing can stop the inevitable. Everyone lowkey knows how they will sell this time. Hence this run will be bigger than last time. Good luck all longs. Time is near. Once this starts, the pump of stocks will begin. This will be the golden age of wealth during the Elon Trump era.
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Ok-Afternoon-2113
11/23
Just a small rise for $GME would be nice to see. I'm not too concerned about it reaching a new high yet. Next week, I'm predicting a rise of at least 32%...
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I_kove_crackers
11/23
If you're wondering about $GME, I wouldn't bother asking.
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Traditional_Wave8524
11/23
$GME, despite the surge in useless crypto, continues to lag behind. Why can't GME reach new heights?
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Big-Decision-1458
11/23
$GME has $15 calls expiring on 12/6. The likelihood of this happening is higher than MOASS. $GME would have gone bankrupt long ago if not for the power of memes. Who still buys physical copies of video games? $GME is the next Blockbuster.
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Mylessandstone69
11/23
$GME Here's the thing—everyone who's saying RC will dilute the stock is just blowing hot air. Nobody really knows, but there's no reason to believe it's necessary. The company has plenty of cash on hand and is now profitable after cutting costs and launching new business ventures like PSA. The last dilution wasn't about money; it was to raise the floor for the stock price and set up a perfect gamma squeeze. With bullish technicals, institutional buying, and Trump's election win, there's no need for dilution. Let it run to infinity. The whole point of MOASS was to disrupt the financial system and bankrupt the hedgies who shorted like Citadel. A dilution would save them, but I think it's unlikely.
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GnosticSon
11/23
People sleeping on active management might miss out on real gains. But hey, passive investing is simple and easy to understand – just watch and wait! 😊
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LurkerMcLurkington
11/23
Active management needed; passive = sheep mentality
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BURBEYP
11/23
ETF transparency matters, check those holdings daily
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Gurkaz_
11/23
Passive isn't always chill. When everyone dives, we splash together. 😅
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Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.
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