macrocephalopod

But they do trade every day when they get inflows and outflows no?

Yes absolutely (or an AP trades for them) and I should have mentioned it in my list of reasons that index funds trade. But this is very different to arguing that index funds are forced to trade purely because of price movements.

When they get an inflow and have to purchase, they are proportionally buying more of the larger companies. So that does create some momentum, no?

Only if you think that larger companies are less liquid (hence more subject to price impact) than their market cap implies *and* that flows are positive (in the case of outflows the larger companies would suffer bigger drops which would create reversion, not momentum)

They don't have to be less liquid, they just have to have the same amount of liquidity relative to the other holdings right? If liquidity is proportional to market cap and flows are positive, it seems like there could be momentum.

If all stocks in the index equally liquid then inflows wd not create any *relative* price impact so there wd be no *relative* momentum (although of course all stocks in the index wd rise, by roughly the same amount, so there would be absolute momentum if price rises beget flows)

Okay so you're saying a company valued 2x more would take 2x more capital to raise the price by X%, and so it evens out when there are inflows? I could buy that

Yeah that’s my first order claim (obviously there will be some variation and special cases but this is basically accurate for most stocks)