What we lose when the world goes all-in on index investing

When Carol Geremia, president of Boston-based mutual fund company MFS, started in the business 40 years ago, the investing world was in a dark and different place.

Though the market was beginning to recover from a brutal, decade-plus bear market that had ended in 1982, many investors had little faith in stocks. And passive investing was in its infancy. In March 1985, the Vanguard 500 Index Fund had a mere $330 million in assets.

Today, “Stocks usually go up"’ has become the mantra on Wall Street. As for indexing, that same Vanguard 500 Index Fund index now has $1.4 trillion in assets. According to Morningstar, passive funds writ large now hold more assets than active funds; $16.1 trillion in assets versus $14.4 trillion, compared with $4.1 trillion versus $9.6 trillion 10 years ago.

Riding this four-decade wave of bullishness while buying passive funds has helped many investors fatten returns. From March 1988 to March 2025, the average total annual return for the S&P 500 was 12.6%. But while Geremia acknowledges that indexing has helped reduce fees and given investors broader market exposure, she sees some unhealthy signs beneath the surface.

In a recent white paper titled “Playing a Bigger Game," Geremia writes about professional investors and “a growing disconnect, between what the investment industry should be doing and what it is actually doing. Its true purpose, she says, is to “support economic prosperity through the responsible allocation of capital and helping investors achieve their financial goals."

Geremia says money managers today care more about beating indexes and benchmarks and less about finding great long-term investments in companies. “We’ve sort of dumbed it all down and sucked out of the system our