How to think about the unstoppable rise of index funds

THE HISTORY of modern finance is littered with ideas that worked well enough at small scale—railway bonds, Japanese skyscrapers, sliced-and-diced mortgage securities—but morphed into monstrosities once too many punters piled in. When it comes to sheer size, no mania can compare with that for passive investing. Funds that track the entire market by buying shares in every company in America’s S&P 500, say, rather than guessing which will perform better than average, have attained giant scale. Fully 40% of the total net assets managed by funds in America are in passive vehicles, reckons the Investment Company Institute, an industry group. The phenomenon warrants scrutiny.