Outside of the performance disparity described above, there is an element to passive investing trends that would seem to undermine market efficiency. Theoretically, the more investors relegate money to passive strategies, the more volatile we can expect markets to become. 19 When the pool of investors is not simply a pool of naive irrational actors and sophisticated investors but also includes passive investors, the pricing for securities that are included in passive portfolios become increasingly inelastic. As passive investors do not buy or sell based upon the irrational actions of others, the greater the passive investors' overall proportion of the market, the greater the impact that irrational market participants will have on the volatility of underlying security prices. 20 Note that this tendency is not predicated on market capitalization, but the fraction of the overall market invested in passive investments. As was explained earlier in this chapter, passive investing is a growing trend and is likely an even greater proportion of the large-cap investing universe.
Theoretically, the passive investing trends described previously, would seem to create opportunities in the large-cap subset of the market for those who seek to exploit market inefficiencies. Moreover, in practical terms, an intuitive argument can be made that the less active money available to monitor and react to public information, the more likely it is that markets will become increasingly inefficient. The move toward passive investments incrementally cedes money from the hands of actionable investors, who would be inclined to sell overvalued stocks and invest in undervalued stocks, to strategies that are agnostic on such matters. Do these influence markets? Ingo Fender of the Bank for International Settlements believes as much, noting that "industry trends . . . seem to suggest that the ability of institutional investors to engage in risky arbitrage strategies might have been reduced." 21 This, of course, is not to say that pricing mistakes are not rectified, but just that it is more difficult to do so. For investors, this could be seen as an opportunity, but one that requires patience. I'm not alone in this view. In a survey of 237 asset managers, pension plans, pension consultants and fund distributors from 29 countries, Amin Rajan of CREATE- Research concludes that passive investments will "attract huge inflows: up to 55% of new fund flows by 2019." 22 However, as Fender at the Bank of International Settlements notes, such advances do not come without problematic side effects. Rajan concedes that this trend likely will lead to pricing anomalies, but that this could also create opportunities for active managers who seek to profit from the dislocations. In short, while there is certainly room for further research on this matter, there is no question, that there is a movement underway. This movement away from actively managed funds and portfolios likely has ramifications, as the proportion of investments becomes less engaged in evaluating companies to any degree. Investors have traditionally had two voices in the management of companies:
1.They can sell their shares, and voice their dissatisfaction by action.
2.They can vote their shares in a manner that reflects satisfaction or dissatisfaction.

Author's Bio: 

I am Srishti Jain From money maker research . we provide Stock Tips and Free stock Tips visit our website.