You’ve probably seen the headlines: “Index investing is distorting the market.” Or “ETFs are creating a market bubble.” These dramatic claims tend to resurface whenever markets get shaky or when active managers underperform… again.
But is there any truth to the idea that passive investing is causing market dysfunction?
In this article, we break down the biggest myths about index investing, and why, despite the noise, it continues to be one of the smartest and most cost-effective ways to grow your wealth over the long term.
Myth 1: “Index investing is distorting the market
While it’s true that index investing has grown significantly over the past 20 years, it’s nowhere near the takeover that critics suggest.
Contrary to noise, active management assets under management (AUM) continues to far exceed those of passive index funds. Even though index fund AUM saw a 1,500-fold increase from 1989, it still only represented 32% of all fund AUM by the end 2021 and less than 40% in 2025.
Claims passive investing is overtaking active management are largely based upon a few exceptions – most notably for certain categories within the US market (where index investing is most popular), active funds still currently hold the majority of assets.
Myth 2: “Index funds cause a market bubble”
Critics argue that since index funds buy the biggest stocks, they just make the big get bigger, pushing prices up irrationally. But that’s not how markets really work.
Yes, index funds are market-cap weighted, but that means they’re buying more of the largest companies because they’ve already grown in value, not inflating them artificially.
When large stocks fall out of favour (like Meta or Tesla during pullbacks), index funds automatically adjust their exposure, reducing the percentage holding within the ETF. This “autopilot” feature of index investing can actually help reduce investor bias and emotional trading.
Myth 3: “There’s no price discovery anymore”
Price discovery refers to the market mechanism by which an asset price is determined through the interaction between buyers and sellers. The influence of supply and demand, amongst other factors, leads to an asset arriving at a price that reflects the current market sentiment of an assets value. Some claim that passive investing is undermining efficient markets by reducing the number of people trading in the underlying stocks, meaning it’s harder for buyers and sellers to establish a price that reflects the true market value.
The reality? The majority of daily market trades are still driven by active participants, institutions, fund managers, analysts, and even high-frequency day-traders. Index funds don’t set prices, they follow them.
So long as active investors exist (and they always will), price discovery remains alive and well.
Myth 4: “Index funds are risky in a market crash”
Another misconception is that ETFs and index funds are fragile, and that in a downturn, they’ll collapse faster. But this was tested during the COVID-19 crash and again during more recent periods of market volatility.
Index funds held up exceptionally well, providing liquidity when many active funds froze redemptions or were forced to sell. Because they hold broad baskets of companies, index funds often bounce back faster than concentrated active bets.
Index funds are also less likely to ‘go bust’ than holding individual shares, they don’t have the same risk of insolvency as companies or actively managed funds.
Why are some people negative towards index investing?
Simply put: money is flowing away from underperforming active managers, and some aren’t happy about it.
It’s easier to blame “the system” than to explain underperformance. But the numbers don’t lie, over the past 10 years:
- 80–90% of active managers underperform their benchmark after fees (according to S&P SPIVA data).
- Index funds offer lower costs, broader diversification, and more consistent long-term results.
Stockspot’s verdict: keep it simple and stay the course
At Stockspot, we believe index investing isn’t destroying markets, it’s democratising them. By making low-cost, diversified portfolios accessible to more Australians, they’re helping investors avoid unnecessary fees and short-term noise.
We don’t believe in chasing the latest hot stock or paying high fees for promises that rarely deliver. Instead, we stick to a time-tested strategy: diversified, passive investing tailored to your goals.
If you’re wondering whether indexing is still the right approach – we believe the answer is yes.
