Matt Levine’s Money Stuff: Index Funds Buy High and Sell Low

Index funds and adverse selection

A thing that people used to worry about is “what if index funds get too big?” If most of the money in the stock market is not run by people who are picking stocks and evaluating companies and deciding how much they are worth, but by people who just buy all the stocks at whatever the price is, that seems like it might have weird results. “Worse than Marxism,” some Sanford C. Bernstein & Co. analysts once called it: With only passive investors, how could the market allocate capital?

These days that worry has ...