The Butterfly Effect in Index Funds and the Mathematical Ripple Behind Mega Cap Growth
Over the past two decades, the investment landscape has witnessed a significant shift in the balance of power between large and small companies.
Over the past two decades, the investment landscape has witnessed a significant shift in the balance of power between large and small companies. As small-cap stocks were once touted as the growth engines of the stock market, the rise of mega-cap companies, especially within the technology sector, has redefined market dynamics. A surprising explanation for this phenomenon has emerged, one that draws from the world of nonlinear dynamics: the butterfly effect.
In this article we will look into the hypothesis that index fund flows—small, almost imperceptible at first—have compounded over time, contributing significantly to the rise of large-cap stocks and their dominance in financial markets. Building on academic research and financial theory, we explore how passive investing influences market dynamics and how the butterfly effect—a small cause leading to large outcomes—can explain the unexpected growth of mega caps.
Small Index Fund Flows cause Large Market Impacts
At the heart of this anal…