Are Index Funds Immoral?
| Lasse Lien |
If I had money to invest, which I don’t, I would probably invest via an index fund. I know just enough empirical finance to realize that beating an index fund is very difficult (impossible according to some) unless you are either very lucky or an inside trader. The reason is of course the efficient markets hypothesis. The stock market factors in all relevant information at lightning speed and without bias. However, this can only be so because there are enough investors that do not invest via index funds. If everyone did, the pricing would not be informative at all. One might argue that index fund investors are free riders on those that do fundamental analysis, and a sinister threat to the very market efficiency that they thrive on.
I guess in equilibrium one would expect index investing to increase until market pricing is so inefficient that the expected returns from it is driven down to around the levels of the best alternative.