Passive Crossed Half the Market. Who Took Over the Judgment?

An index fund is not a promise to beat the market. It is a promise to buy it—to hold whatever the index holds, without asking what is dear and what is cheap. For an individual, a sound choice: lower cost, instant diversification. But that promise not to judge has now crossed half of all fund assets. At the end of 2023, U.S. passive fund assets reached about $13.29 trillion and passed active funds (about $13.23 trillion) for the first time on record. The gap has widened since. That is where the problem starts. Someone still has to price securities and monitor companies—and the people who used to do it have stepped off the field. The judgment has not vanished. It has only changed seats. This piece follows where it went.

First, the terrain in a few numbers.

Sources: Morningstar (assets), S&P DJI · FactSet (concentration), Bebchuk & Hirst (Big Three). As-of dates as labeled.

The numbers all point one way. Money pools into the "judgment-free" side, yet for the market to function someone must still judge. That judgment has relocated to three places: the desk that prices, the desk that decides what gets bought, and the desk that monitors companies.

Who Sets the Price?

Passive money does not buy and sell on information. It buys because the index holds it. So the work of pricing—of impounding which stock is cheap and which is dear, i.e. price discovery—falls on the active investors who remain. The thinner that crowd, the fewer shoulders carry the burden of setting the price.

Here a 40-year-old theorem kicks in. In 1980, Grossman and Stiglitz proved that an informationally efficient market is impossible: if prices already reflect all information, the payoff to gathering it falls to zero, so no one gathers it, and prices lose their information again. The market must always keep someone digging. Active management cannot, in theory, go to zero. However large passive grows, price discovery does not disappear—it concentrates onto a few.

Whether that concentration has broken the market, the data does not speak with one voice. One study finds that as passive ownership rises, the degree to which prices pre-impound earnings fell about 16%, with a 15-percentage-point rise in passive ownership explaining 33–40% of that decline. Another points the opposite way: as indexing grows, information production clearly falls (Google searches −3.8%, regulatory-filing views −14.1%, analyst reports −10.8%), yet price efficiency itself is statistically unchanged—because the remaining few active investors arbitrage prices back into line. The two findings reconcile on top of Grossman-Stiglitz. The number of people digging for price falls; the function of getting the price right holds up on fewer shoulders.

In 2019 Michael Burry likened passive to the synthetic CDOs of the pre-crisis years, warning that "passive investing has removed price discovery from the equity markets." "Removed" is an overstatement. What the data supports is not removal but concentration. Concentration, though, carries its own bill. The thinner the shoulders holding the price, the thinner the countervailing judgment left to catch it when those few are wrong or pull out at once. The crowd riding the index takes the outcome without ever sitting in on the call.

Who Decides What Gets Bought?

An index is not a fact of nature. Someone writes it. A handful of index providers—S&P Dow Jones, MSCI, FTSE Russell—decide by rule which companies go in and which come out. Scholars argue these providers hold a "private authority" over capital allocation, a de facto gatekeeper power: constructing an index is not neutral engineering but a political choice. Because a single inclusion decision becomes a flow of money.

In December 2020, Tesla was added to the S&P 500. It was the largest addition on record, and index funds had to buy roughly $90 billion of Tesla shares mechanically—regardless of any portfolio manager's view (an S&P analyst estimate). The inclusion-day closing auction was the largest ever, with about 69 million shares trading at $695. One committee's decision forced tens of billions in buying. A rule change exerts the same force. When MSCI added mainland Chinese A-shares to its emerging-markets index in 2018–2019 and raised the inclusion factor from 2.5% to 20%, that ratio adjustment alone moved passive money mechanically.

The judgment of "what to buy" is delegated here, to a rule. The index investor does not pick stocks. They have handed that work to the few committees who wrote the rule that picks them.

Who Monitors the Companies?

The third desk is governance. To hold a stock is to bear the duty of monitoring management and casting a vote—but an index fund never sells, so it becomes a permanent shareholder. And those permanent shareholders have bunched into a few hands. BlackRock, Vanguard, and State Street—the Big Three—together hold about 20–22% of S&P 500 companies, nearly four times the 5.2% of 1998. Stronger than the stake is the vote. Because they vote nearly all of their shares while many retail holders do not, the Big Three actually cast about 25% of the votes at S&P 500 meetings. The authors project that share rising to about 34% within a decade and about 41% within two.

The man who understood this structure better than anyone sounded the alarm. Jack Bogle—Vanguard's founder, the inventor of the index fund—wrote in 2018 that "it seems only a matter of time until index mutual funds cross the 50% mark," and that he did not believe such a concentration of corporate control in a few institutions "would serve the national interest." The warning of the designer watching his own tool cross a threshold.

There are attempts to hand it back. BlackRock introduced pass-through Voting Choice so clients can cast votes themselves. But the scale shows the delegation has only partly returned. Of $6.9 trillion in index-equity assets under management, $3.3 trillion is eligible to choose—yet clients who actually took up the vote represent about $784 billion, a quarter of the eligible pool. The rest is still voted by BlackRock's desk. Monitoring has not vanished. It is simply being carried, thinly, by a few stewardship desks splitting thousands of annual meetings among them.

The Money That Could Lean Against Concentration Has Thinned

The top-10 weight of the S&P 500 reached about 40.7% at the end of 2025, a record—more than double the level of a decade earlier (about 19%) and well past the dot-com peak of 2000 (about 26%). Passive did not create this concentration; above all it is the earnings and prices of those mega-cap tech names that lifted it. But by construction—cap-weighted—passive money buys the largest names more, in proportion to weight. Which means it never moves against the concentration. The countervailing judgment that trims what has grown dear and adds what has gone cheap thins out precisely as the market tilts one way. Not the hand that built the crowding, but the seat where the hand that could have stopped it is emptying out.

So, Who Took It On?

That passive is the right choice for an individual does not change. The problem is the fallacy of composition. When one person's rational choice—to delegate judgment—becomes the majority's, the work of pricing and monitoring does not go vacant; it relocates to a few seats. Price is taken on by a thinning active fringe, what-to-buy by the rules of a few index providers, monitoring by the voting desks of the Big Three. The responder did not disappear; the response was delegated to a few.

The bill arrives when those few are wrong. When thin price discovery lets a mispricing stand, when one committee's inclusion rule herds money to one side, when a few stewards vote thousands of companies thinly. The crowd riding the index bears the result together, while its channel to weigh in on the call is structurally thin. The act of handing off always erases someone who answers (delegating lethal force). What passive has erased is the dispersed responder who would have judged the price and the company.

For an investor with a long horizon, what matters is not next quarter's return. How far the passive share goes, how high the top-name concentration climbs, what the index providers' inclusion rules make the market buy and sell, and whether the few who hold the vote actually give it back—these are the larger variables. The judgment you delegated is being made for you right now, by someone. Knowing who that someone is—that, too, is part of index investing.