Are Index Funds Headed for a Reckoning?

Investors might think their index funds don’t actively bet on any companies or industry sectors. New research shows otherwise.

In the current market environment, investors are facing concentrated risks comparable to periods in the late 1990s during the historic run-up in the prices of technology stocks, according to a research paper expected to be released this week by index provider Syntax. Several core market-capitalization-weighted equity indices, which are considered to be diversified, are now exhibiting elevated levels of a new measure called active business risk, defined by the paper as the risk from an index being overexposed to a particular sector as opposed to being neutral on the market.

Investors who put money in index funds generally expect them to be neutrally positioned and well diversified, with the goal of capturing a broad market equity risk premium. That’s not happening right now, according to Syntax CEO Roy Riggs, research director Simon Whitten, and senior vice president Jonathan Chandler, who authored the paper.

Read Whitten's full quote here.