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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.
Not sure I get your point. Presuming 3-5% cash, absolute pi would be a function of the available liquidity of the stock relative to the desired position size imo. The relative price impact point is an interesting thought.
By absolute price impact I mean impact on the valuation of all stocks (eg total market price to earnings). If you redeem from a fund which is 97% invested in US stocks and buy a fund which is 100% invested in US stocks you won’t change the overall market valuation.
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