Will investors in passive index funds overwhelm the ability of active investors to keep prices near fundamental value? If so, what happens? In their March 2026 paper entitled "A Model for Passive That Breaks the Market", Michael Green, Hari Krishnan and Stephan Sturm model the impact of passive share on equity market behavior. Their model has the following assumptions:
- Passive fund managers ignore fundamental value.
- Equity index volatility tends to be higher when prices are low.
- The fundamental value of the broad stock market tends to increase over the long run.
- Active investors historically tend to push prices toward some notion of fair value. However, they may stop resisting above some passive share threshold, shorten their investment horizons and make little use of fundamentals.
- Strength of reversion to fair value decreases as passive share increases.
The model considers cases for which active investors either do or do not change their behavior when faced with increased passive share. Using the above modeling assumptions and data for the S&P 500 during 1926-1994 as a baseline for the U.S. equity market without passive investing, they conclude that:
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