Are shares disconnecting from reality?
What effect is passive investing having on shares, and are ETFs going the same way?

The rise of passive investing is making markets “less efficient and more fragile”, says Tom Stevenson in The Telegraph. Somewhere between a third and half of equity assets under management are now passive, meaning they are held by funds seeking to track market indexes without trying to beat them. Passive investing offers lower fund manager fees than the active variety.
The problem? Too much passive investing makes for less discerning capital allocation, with money blindly pouring into markets according to “fund flows” and “weightings”. Share prices are thus prone to becoming disconnected from reality – although more inefficient markets do at least open the way for active stock pickers to spot mispricing opportunities and scoop up bargains.
Are ETFs following?
A new generation of actively managed exchange-traded funds (ETFs) is trying to do just that, says The Economist. Inflows into “active” ETFs have surged from less than $5 billion in 2019 to over $100 billion last year. Investors should be wary. ETFs have revolutionised markets.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But active ETFs are undoing that progress, charging high fees in exchange for complicated promises of “volatility protection”, or exposure to illiquid assets in private equity and debt. They are usually a “rip-off”. Another popular trend is “thematic” ETFs, which let investors play everything from pet care to Chinese cloud computing, says James Mackintosh in The Wall Street Journal. But the approach is failing.
Artificial intelligence (AI) has dominated markets for most of this year, yet AI-themed ETFs have actually underperformed the US and global stock benchmarks (you would have done better by just buying Nvidia). Three AI ETFs even managed to shed value in 2024 – picking the right theme at the right time and still losing money must be “galling”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
UK-US trade deal announced: US cuts tariffs on UK car imports to 10%
Keir Starmer and Donald Trump have announced a UK-US trade deal, but the US president has refused to lift baseline tariffs on most UK goods. What does it mean for the UK?
-
How to use mid-caps to diversify from the US
Medium sized companies are overlooked by investors but could offer an attractive ‘sweet spot’. We consider the case for mid-caps amid market volatility.
-
Will Comstock crash – or soar?
Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.
-
'As AGMs go digital, firms must offer a new form of scrutiny for shareholders'
Opinion Technology has rendered big AGM meet-ups obsolete, but the board still needs to be held to account, says Matthew Lynn
-
Unilever braces for inflation amid tariff uncertainty – what does it mean for investors?
Consumer-goods giant Unilever has made steady progress simplifying its operations. Will tariffs now cause turbulence?
-
Two ways to tap into monopoly profits from airports
Most investors can’t get their hands on airports. Here are two ways you can
-
Fat profits: should you invest in weight-loss drugs?
The latest weight-loss treatments could transform public health and the world economy. Should you invest?
-
How investors could profit from Ramsden Holdings' four-part growth strategy
Ramsdens Holdings offers a diversified set of financial and retail services and a juicy yield, says Dr Michael Tubbs
-
How to invest in the booming insurance market
The insurance sector is experiencing rapid growth after years of stagnation. Smart investors should buy in now, says Rupert Hargreaves
-
Out of America's shadow: Why Trump's tariff chaos may be good for non-US stocks
Opinion Upending global investment and trade could benefit other countries at the expense of the US market, says Cris Sholto Heaton