My query won’t fit to current size of passive markets but I believe it will at some point of time.
Coming to vanilla passive, it is just following some index, so funds will buy any stock which is part of the index and dump the stock if it is leaving that index.
Imagine if passive picks up,then if any stock leaving that index will be dumped by every fund following it,similarly if any stock is being added then again every fund will buy it, I believe this will have effect on price of that stock to a bigger extent. So, basically I want to convey that price of any stock can be moved on mere condition of adding or leaving the index with out it’s fundamental or macro factors.
Every index can have it’s own rules, so index can change it’s rules to kick out or add any stock any time. Can check this as one example.
Example 2- MSCI tweaked some rule which has major effect on markets.
Recently in last budget FM proposes to consider of having minimum public shareholding to 35% from current 25%, one reason on this proposal can be related to passive investing in a indirect way. Government want Indian companies to have higher share in MSCI emerging market indices so that more foreign capital will flow to India and to be part of those it is required to have higher free float.
Having said above I am also a believer of passive investing but not plain, something like hybrid/smartbeta.
Coming to India, currently passive is just beginning so I believe it may take a decade or so to see interest in smartbeta ETFs unless something big happen. Would like to know your view about this.