Possible issues with passive investing
I’m a passive investor myself, so this isn’t some anti-index fund rant, was just curious about the bigger picture. Everyone says “just buy a global tracker and chill,” which is fair enough and is what i do too, but I was wondering about the wider effect when huge amounts of UK savings are constantly flowing into overseas markets, mainly the US.
Most global passive funds are market-cap weighted, so a massive share ends up in large US companies through indices like the S&P 500 and FTSE-all world etc. That means UK investors using passive strategies are often sending more capital abroad than into UK-listed businesses. Meanwhile UK companies can struggle for investment, valuations stay lower, and the cycle keeps reinforcing itself.
Obviously diversification matters and I’m not saying everyone should pile into UK stocks just for patriotic reasons. I also get that the UK market has its own issues beyond this. But I do think it’s interesting to ask whether, at scale, passive investing has unintended consequences for domestic markets and economies.
What are people’s thoughts on this?