A $500 bn haul reignites passive controversy on Wall Street

The passive-investing juggernaut is picking up speed—and it's stirring up fresh angst about the dangers posed by the index-tracking boom across Wall Street.

- LU WANG

With almost a month still to go in 2024, index funds have raked in some $500 billion in fresh cash, while their active counterparts are set for outflows. In recent weeks, that growing dominance prompted outcry from active manager behemoths Apollo Global Management and Citadel, who have blamed the surge in index-following cash for derailing the crucial role of stock pickers as drivers of market efficiency, among other charges.

But two of Wall Street's largest banks have mounted a fresh defense of the allocation frenzy, which has seen US-listed passive ETFs grab a record $105 billion in the last month alone.

Contrary to popular claims that the price-agnostic money is fueling market distortions by blithely lavishing capital just to the largest companies, a Goldman Sachs Group study showed the role of fundamentals, like the stability of corporate earnings, remains an all-powerful driver for stock valuations. Meanwhile, passive players hold a far weaker sway, if any.

Similarly at Citigroup, a team led by Scott Chronert found that active managers themselves exert a far bigger influence than their passive rivals on a stock's performance relative to its industry. It's a rebuttal to critics like Alliance Bernstein's Inigo Fraser Jenkins, who have alleged that index players are distorting asset prices to a unique degree.