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This is better than most articles on this subject but still a fairy tale. Passive investing (buying everything in proportion to market cap) by definition creates no relative price impact. Price impact is only created by active trading.https://www.ft.com/content/994bdda8-b704-4e4c-9b19-4e0021f0b309 …
Switching from an active to a passive fund creates essentially no *absolute* price impact either because most active funds are nearly always fully invested (maybe 3-5% cash). Increasingly they are shadow indexing too so active -> passive switch barely even causes relative impact.
To the extent that flows have depressed the price of small cap stocks, it’s because investors are rejecting small cap funds and choosing an S&P 500 tracker instead, which is an *active* choice.
Value and size are also correlated (small stocks tend to be cheaper) so the choice to buy a large cap index fund rather than small cap also increases the growth/value spread, but again this is an active choice.
I always wonder where such misinformed articles come from. Is it really all about the difficulty of getting ppl to understand something when their salary depends upon them not understanding it? Or is it that the ppl that know do, the ones that don't teach?
Weird how they look for these novel explanations when it seems obvious that the major driver of stock market valuations is net capital inflows into stocks due to expansionary monetary policy and the historically low interest rate environment (even more so in real terms).
One could argue for a non-zero, positive price impact on stocks inflows from active to passive due to the lower amount being siphoned out as fees for capital invested passively. Quite the stretch to frame as a significant driver considering the macroeconomic elephant in the room.
Buying everything in proportion to market cap would reinforce any price action by active, reflexively impacting it into the future. I'm not following your logic.
Individual stocks’ liquidity is not proportional to their market cap so I think new money being put into work via passive can create relative price impact?
I generally disregard the pearl-clutching by brokers and fund managers related to passive investing, HFT and wholesale market making; just guys trying to save themselves from the inevitable.
Hello, please find the unroll here: This is better than most articles on this subject but still a fairy… https://threadreaderapp.com/thread/1444232963995099140.html … Enjoy :) 
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