So I was thinking about the increasing popularity of Index funds the other day and have some questions....
Index funds are basically a collection of stocks meant to mimic the movement of the a certain index(SP500, Dow, etc) correct?
Lets say right now only 10%(Completely made up percent) of individual investors actually buy Index funds now but the gospel is spreading and soon 50% of individual investors are buying index funds instead of mutual funds.
Wouldnt this lead to the stocks in the index funds being overvalued(and then crashing) compared to other stocks not included in the Index's?
Do Index funds adjust for this?
my initial response is "wut?" but the short answer is "no"
No they dont adjust for this or No this though process makes no sense?
in your scenario people are moving from mutual funds to index funds. the same securities in those mutual funds are held in the index funds. they just aren't actively managed and charged.
index funds hold groups of stocks across all ranges, industries, markets, etc. and not just stocks. bonds, real estate investments, etc. the investors moving into them are moving away from either individually owning these assets or owning them in another fund of some sort.
I guess I still don't 100% understand what you are asking but I'm pretty confident the answer is "no".