Jul

26

Dispersion, from Big Al

July 26, 2025 |

There is a debate over the effects of passive investing, eg, whether it causes all stocks to be more correlated in their movements, makes markets less efficient, etc. Here's an interesting take:

Index Investing Makes Markets and Economies More Efficient.

I’m going to argue that the trend towards passive management is not only sustainable, but that it actually increases the accuracy of market prices. It does so by preferentially removing lower-skilled investors from the market fray, thus increasing the average skill level of those investors that remain. It also makes economies more efficient, because it reduces the labor and capital input used in the process of price discovery, without appreciably impairing the price signal.

As for the correlation issue, one can still see dispersion. Here are the S&P components sorted by YTD % return as of 23 July (data source), with stocks such as PLTR, NRG and NEM on the right (+) end, and UNH, LULU, ENPH and DECK on the left (-) end:


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