3 ms·

As I understand it, the index funds aren't drunk and aimless, forced in a certain direction as a side effect of the trades of active investors. They are intent

• yborg 7y ago
  Or the underlying companies that are traded. This "evil zombie index fund" trope seems to imply that index managers just continue to blindly buy the stocks in the index regardless of events, falsely inflating the value of companies. If a company is unable to generate cashflow from its underlying business, this will quickly become evident because it will be unable to pay its creditors and employees. It could take advantage of its "inflated value" by issuing shares to generate cash, but this would then obviously begin diluting the stock and cause the price to fall, the "zombie indexes" wouldn't simply continue to price it at a constant value. I.e. price discovery will happen, just perhaps not as quickly as an active analyst monitoring the stock would do it.