Research

The shift from active to passive investing has moved more than a quarter of the U.S. stock market into portfolios that track benchmarks. Measuring the realized indexed ownership of each stock from its holdings with the Indexing Inclusion Ratio (IXI), I find the most heavily indexed stocks are priced to earn about 1.6 percentage points per year less than the least indexed, yet they were among the strongest performers of the passive era. These two facts are one mechanism at two margins, because indexed ownership grew faster than prices had incorporated and realized returns absorbed the surprise as it arrived. S&P 500 inclusions price the channel at about 2 percent per percentage point of new indexed ownership, close to the standing premium that capitalizes the wedge. Those gains were the transition. The lower expected return is the price of passive ownership going forward.

New money entering passive funds and passive capital already invested in firms play different roles in corporate financing. Passive inflows strengthen the equity issuance response to customer demand, while greater existing indexed ownership predicts a weaker response. I identify real opportunities using federal purchasing growth in customers' markets, which raises supplier sales and equity issuance. When these opportunities arrive, passive inflows shift corporate share supply toward primary shares that raise cash. Inflows have no detectable effect on offering incidence on average. Their financing role emerges in directing new equity toward firms with stronger real opportunities.

A fund can look greener without its manager moving toward lower-emissions firms. Independent measures agree that U.S. mutual fund carbon intensity fell by more than a third, yet portfolio reweighting explains only 1.2 percent. Most of the decline comes from changing issuer emissions, sales denominators, estimates, and coverage. These inputs also reverse the institutional sector trend and reorder manager rankings. In a hypothetical selection, attribution replaces two in five managers and improves subsequent reweighting toward firms with lower emissions conditional on industry and firm characteristics. Carbon scores describe measured exposure; evaluating implementation requires attribution and comparable coverage.

Retail investors reveal in public which stocks they are crowding into, and those stocks become more volatile the following week. Option prices, the market's forecast of that volatility, absorb only about half the signal. Measured from 86.7 million Reddit comments, attention keeps half its predictive power after the full implied volatility surface is observed, and nonlinear readings do not close the gap. The absorbed half runs through the at-the-money term structure, not the smile, which attention nonetheless reshapes. It is also transitory: the implied volatility that attention raises reverses within a week while the stock's volatility is still being realized, and buyers of that volatility lose. The unabsorbed half improves volatility forecasts out of sample. Controlling for implied volatility does not control for what retail attention predicts.