THE AMERICAN ACADEMY OF ARTS AND SCIENCES

1932 Science  
Trillions of dollars are invested through index funds, exchange-traded funds, and other index derivatives. The benefits of index-linked investing are well-known, but the possible broader economic consequences are unstudied. I review research which suggests that index-linked investing is distorting stock prices and risk-return tradeoffs, which in turn may be distorting corporate investment and financing decisions, investor portfolio allocation decisions, fund manager skill assessments, and other
more » ... essments, and other choices and measures. These effects may intensify as index-linked investing continues to grow in popularity.  I am grateful for helpful comments by
doi:10.1126/science.75.1952.557-a fatcat:m3fey7bwzjb6nfvldhha23aczu