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Index Funds Caution

Gregg Wolper spotlights a "hidden drawback" of index fund investing in this article from Morningstar via Yahoo Finance. Referring to "weighting creep," Wolper says "[index] funds tend to put more of their money into stocks (or sectors, or countries) that are rallying. ...[and] when such funds receive inflows, the manager must buy more and more of the hottest stocks (or bonds), chasing them higher and higher and higher...; the weighting of those securities becomes greater and greater, because their market values are soaring while those of other portfolio holdings are either rising less rapidly, stagnating, or falling." Citing examples in Japan and emerging markets, Wolper shows how "index funds are in effect momentum players."