# Passive Investing's Active Problem

**Author:** Philipp D. Dubach | **Published:** February 15, 2025 | **Updated:** February 23, 2026
**Categories:** Investing
**Keywords:** passive investing market volatility, index funds increasing volatility, passive investing risks, index fund market impact, active vs passive investing volatility

## Key Takeaways

- Research to be published in the American Economic Review finds that passive fund growth amplifies each individual trade's price impact because active managers are too slow to arbitrage mispricings
- When most capital is on autopilot through index funds, the few remaining active traders exert disproportionate influence, turning ordinary sell orders into broader market swings
- Passive investing's core benefits still hold for most investors, but the increasingly passive market structure has unintended systemic consequences during periods of stress

---

(1) A new academic paper suggests the rise of passive investing may be fueling fragile market moves.
(2) According to a study to be published in the American Economic Review, evidence is building that active managers are slow to scoop up stocks en masse when prices move away from their intrinsic worth.
(3) Thanks to this lethargic trading behavior and the relentless boom in benchmark-tracking index funds, the impact of each trade on prices gets amplified, explaining how sell orders can induce broader equity gyrations

Passive investing, the supposedly boring strategy of buying and holding index funds, might actually be making markets more volatile. A new study set to be published in the American Economic Review finds that active managers are slow to scoop up stocks when prices move away from their intrinsic worth. Meanwhile, the relentless boom in benchmark-tracking index funds means that each trade gets amplified, explaining how sell orders can induce broader equity gyrations.
Justina Lee for Bloomberg writes that this week's AI-fueled market swings perfectly illustrate the phenomenon. Big equity gauges plunged on Monday over fears about an AI model, before swiftly rebounding. 

>Thanks to this lethargic trading behavior and the relentless boom in benchmark-tracking index funds, the impact of each trade on prices gets amplified.




































































































































































The researchers from UCLA, Stockholm School of Economics, and University of Minnesota have identified what they call "Big Passive"—a financial landscape that's proving less dynamic and more volatile. When most investors are on autopilot, the few remaining active traders have disproportionate influence.
This doesn't invalidate passive investing's core benefits—lower costs and better long-term returns for most investors remain compelling. But it does suggest that our increasingly passive financial system has some unintended consequences.


---

## Frequently Asked Questions

### Does passive investing make the stock market more volatile?

Research published in the American Economic Review suggests that it does. Because active managers are slow to buy stocks when prices deviate from their intrinsic worth, the growing dominance of benchmark-tracking index funds means each individual trade has a larger impact on prices. This amplification effect can turn ordinary sell orders into broader market swings.

### How do index funds amplify market sell-offs?

When most investors are on autopilot through index funds, the few remaining active traders exert disproportionate influence on prices. Researchers from UCLA, Stockholm School of Economics, and the University of Minnesota found that lethargic trading behavior among active managers, combined with the boom in index funds, amplifies the impact of each trade, allowing sell orders to cascade into wider market gyrations.

### What is "Big Passive" and why does it matter for investors?

"Big Passive" is a term used by researchers to describe the current market structure where the majority of investment flows into benchmark-tracking funds. It matters because this shift has made markets less dynamic and more prone to sudden volatility. While passive investing still offers lower costs and strong long-term returns for most investors, its dominance creates unintended systemic consequences.

### Should I stop investing in index funds because of volatility concerns?

Not necessarily. The research does not invalidate passive investing's core benefits, including lower fees and better long-term returns for most investors. However, it does suggest that the increasingly passive financial system has unintended consequences, such as amplified short-term volatility. Investors should be aware of these dynamics, especially during periods of market stress.


---

*Philipp D. Dubach — [http://philippdubach.com/](http://philippdubach.com/) — 2025*