Index funds are going to expand until they're a big enough segment of the market that they're worth trying to exploit through predatory strategies. Eg: getting

Index funds are going to expand until they're a big enough segment of the market that they're worth trying to exploit through predatory strategies. Eg: getting a long position in a stock and taking action to get it included in an index and forcing index funds to buy into your position. Or the opposite - short position and de-listing a stock. Or more complicatedly, manipulating your public float in order to squeeze market-cap indexers. The last one needs explanation. Suppose indexers think they should own 10% of your company. Issue stock, and "sell" that stock in a self-dealing manner at current market prices. Indexers now should buy stock, since your company is bigger on paper (more shares outstanding at the same price). In the degenerate case, >90% of the stock isn't actually available for sale on the public markets, and the indexers have to buy literally more shares than they can buy. Note that this pattern of strategies happens organically. Whenever there's a population filled with agents that pay costs to enforce rules, there's a superior local strategy of free-riding on their rule enforcement, since defectors cannot operate in a enforcer-heavy environment. This also is what'll cause a drop in index funds - wide-scale losses due to fraud and prices temporarily disconnected from fundamentals.