CobaltBlue, Love your moniker. Anyway, index funds (and indexed portfolios that are not funds, such as private accounts at banks) and quasi-index funds are now huge. And, the main thing is, they are brain dead. They never say, should we buy XYZ. If it is added to the index they have to buy it and if it is dropped from the index, they have to sell it.
That being said, other portfolio managers, market makers, and specialists know what and when these robots have to make their moves, and they raise their offering prices or lower their bids accordingly. Which means that index players always buy high and sell low on a short term basis. That definitely distorts the prices of new additions or subtractions from the indices.
However, once an issue is in an index and until it is kicked out (or, until disaster hits, see below), the index funds have an undue lifting influence on its price. If 40% of the shares are held by indexers or closet indexers, the supply of shares is going to be limited for buyers, who will have to pay up. But the supply will be large for short sellers, as indexers lend securities, so another class of certain bidders is created. So, IMHO, the indexing scam is one of the major factors behind the markets hitting valuation levels never before seen during anything other than a depression (pe ratios are often very high during a depression because there are no earnings).
The thing that breaks this virtuous cycle is mass redemption that forces indexers to sell at bargain prices. And that is as certain as death and Texas. <G> When is the only question.
MB
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