Growth of ETFs and index investing is no threat to market efficiency, study says

The triumph of indexing, or investing in indexes such as the S&P 500, has to rank at or near the top of investing trends.

Is the growth of passive investing a threat to the stability of the stock market? A new study says you shouldn't worry. There have been several very successful investing trends in the last 30 years. Two examples: the 401, and Exchange Traded Funds. These are all important trends for investors. But even among those successes, the triumph of indexing, or investing in indexes such as the S & P 500, has to rank at or near the top.

Lazzara's conclusion: "The valuation of index constituents is ultimately decided by active managers whose trades are motivated by their own research." Will passive make markets 'inefficient'? But what about the other part of the question: could passive investing become so big that it will overwhelm active trading and make the markets "inefficient"? Remember, Lazzara concluded that active managers still do 91% of the trading.

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