Your intuition seems correct but with a big caveat. If you divide the market in two, active to one side and passive to the other, both of them will have the exa

Your intuition seems correct but with a big caveat. If you divide the market in two, active to one side and passive to the other, both of them will have the exact same returns as a group. That's because all the passive investor is doing is replicating the market average and not changing it so the mix of stocks the total passive investors hold is the same as the mix of stocks the total active investors hold. That means as more money gets invested in index funds pricing becomes worse and thus there are more active funds that make a lot of money and more active funds that lose a lot of money and on average they still make the same returns before fees than the passive funds. It only stops being like this if pricing gets so poor that active funds can start to trade in ways that the passive funds can't replicate, either because they're faster or more frequent or have some other trading advantage that makes it very hard for the passive fund to replicate it effectively.