Index Funds, Asset Prices, and the Welfare of Investors
40 Pages Posted: 3 Jan 2023 Last revised: 10 Sep 2023
Date Written: September 10, 2023
We study the effect of index funds on asset prices and the choices and welfare of investors. In our model, investors choose among bonds, individual stocks, and an index Fund that holds the market portfolio. Asset prices are determined endogenously. The availability of the Fund induces investors to shift out of individual stocks and bonds and into the Fund. The former shift reduces investor risk and increases investor welfare; the latter shift increases asset prices and decreases investor welfare. In a wide variety of settings, we show that the net effect is that availability of the Fund decreases investor welfare.
Keywords: portfolio choice, asset pricing, ownership, indexing, inequality, household finance
JEL Classification: D14, D53, G11, G12, G23
Suggested Citation: Suggested Citation