Passive index funds are actively creating bubbles

In August 1976, Vanguard Group founder Jack Bogle did something on Wall Street that no one believed in: he launched the world’s first index fund for retail investors—Vanguard First Index Investment Trust—aimed at tracking the S&P 500, without stock selection or market timing, simply seeking to earn the market average return. He initially hoped to raise 50 million USD, but ended up with just 11 million USD. That year, the Financial Analysts Journal’s review reflected the industry's attitude: index funds were “a coward’s choice” that would soon disappear.

Fifty years later, index funds not only did not disappear, but have instead taken over half the market.

By the end of 2025, US index mutual funds and index ETFs together will have reached 19.1 trillion USD in assets, making up 52% of all long-term fund assets—the first time in history this has surpassed half. For funds investing specifically in US domestic stocks, the passive share is 64%. BlackRock, Vanguard, and State Street—these three passive giants—manage over 20 trillion USD combined, and are the largest single shareholder in nearly 90% of S&P 500 companies. Whether you invest through personal accounts, corporate pension plans, or university endowments, it is almost impossible not to hold at least one index fund.

This is a revolution in every sense. The problem is, this revolution has been so thoroughly won—that it has itself become a new kind of systemic risk.