Passive Investing's Rise: Is the Myth of Market Efficiency Broken?

Recent market volatility has sparked questions about market efficiency. A new study suggests the rise of passive investing has led to slower reactions by active managers to price discrepancies, amplifying the impact of individual trades. The growing dominance of index funds has decreased market sensitivity to price changes, potentially leading to increased volatility, reduced capital allocation efficiency, and even market failure. While the study's conclusions remain debated, it raises concerns about the potential risks of passive investing, particularly its impact on large-cap stocks.