This is not entirely true. Passive funds only perform transactions in response to change in market cap. Market cap value change for any company is entirely cont

This is not entirely true. Passive funds only perform transactions in response to change in market cap. Market cap value change for any company is entirely controlled by active funds. In other words, you can think of passive funds as observers in market who follows what active funds will do in aggregate. The entire reason passive funds out perform active funds is because they sort of act like ensemble of active funds. Now think of a world where passive funds dominates investments and very few active funds survive. Now the market cap variance increases and small changes induced by active funds gets hugely amplified by passive funds. For example, a hedge fund may decide to liquidate their position on XYZ due to random reason and can trigger 1% change in price (because active funds willing to buy might not be high in number). This then immediately changes market cap and all passive funds will rush to liquidate as well which will tank that company. This obviously can be gamed by clever active funds. As more and more investment becomes passive, I think the ROI for those investors reduces significantly compared to active investors. I am working on theory part for this. If anyone is interested, please feel free to email me.