The rise of passive investing: A systematic literature review applying PRISMA framework

Malhotra, Priya Article The rise of passive investing: Asystematic literature review applying PRISMA framework Journal of Capital Markets Studies (JCMS) Provided in Cooperation with: Turkish Capital Markets Association Suggested Citation: Malhotra, Priya (2024) : The rise of passive investing: Asystematic literature review applying PRISMA framework, Journal of Capital Markets Studies (JCMS), ISSN 2514-4774, Emerald, Bingley, Vol. 8, Iss. 1, pp. 95-125, https://doi.org/10.1108/JCMS-12-2023-0046 This Version is available at: https://hdl.handle.net/10419/313317 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ The rise of passive investing: a systematic literature review applying PRISMA framework Priya Malhotra USME East Campus, Delhi Technological University, Delhi, India Abstract Purpose –Passive investing has established itself as the dominant force in the world of professionally managed assets, surpassing the concept of index funds. Its meteoric rise is fueled by investors’preference for its dual benefits of strong diversification and low cost. A comprehensive study of the economic model, addressed areas and market structure has not yet been conducted, despite the existence of numerous studies on more specific topics. To address this gap, this paper examines 943 articles on passive investing published between 1998 and 2022 in SCOPUS and Web of Science. Design/methodology/approach –The study utilizes the most pertinent tools for conducting a systematic review by the PRISMA framework. This article is the result of SLR and extensive bibliometric analysis. Contextualized systematic literature review is used to screen and select bibliographic data, which is then subjected to a variety of bibliometric analyses. The study provides a bibliometric overview of works on passive investment research that are indexed in Scopus and Web of Science. Bibliometrix, VoS Viewer and Cite Space are the tools used to conduct content and network analysis, to ascertain the present state of research, as well as its focus and direction. Findings –Our exhaustive analysis yields important findings. One, the previous decade has witnessed a substantial increase in the number of publications and citations; in particular, the inter-disciplinary and international scope of related research has expanded; Second, the top three clusters on “active versus passive funds,”“price discovery and market structures”and “exchange-traded funds (ETFs) as an alternative”account for more than fifty percent of the domain’s knowledge; Third, “Leveraged ETFs (LETFs)”and “environmental, social and governance (ESG)”are the two emerging themes in the passive investing research. Fourth, despite its many benefits, passive investing is not suitable for everyone. To get the most out of what passive investing has to offer, investors, intermediaries and regulators must all exercise sufficient caution. Our study makes a substantial contribution to the field by conducting a comprehensive bibliometric analysis of the existing literature, highlighting key findings and implications, as well as future research directions. Research limitations/implications –While the study contributes significantly to the field of knowledge, it has several limitations that must be considered when interpreting its findings and implications. With our emphasis on academic journals, the study analyzed only peer-reviewed journal articles, excluding conference papers, reports and technical articles. While we are confident that our approach resulted in a comprehensive and representative database, our reliance on Elsevier Scopus and Web of Science may have resulted in us overlooking relevant work accessible only through other databases. Additionally, specific bibliometric properties may not be time-stable, and certain common distribution patterns of the passive investing literature may still be developing. Practical implications –With this study, it has been possible to observe and chart the high growth trajectory of passive investing research globally, especially post-US subprime crisis. Despite the widespread Journal of Capital Markets Studies 95 JEL Classification —C23, G12, G23 © Priya Malhotra. Published in Journal of Capital Markets Studies. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at http://creativecommons.org/licences/by/4.0/legalcode Declaration of conflicting interests: The authors declared no existing or potential conflict of interests with respect to the research, authorship and/ or publication of this paper. Research involving human participants and/or animals: The author(s) declared that the study was conducted without the involvement of human participants and/or Animals. Informed consent: The author(s) declare that the study was conducted on well-published secondary data and does not involve any informed consent keeping with research ethics. The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/2514-4774.htm Received 3 December 2023 Revised 14 March 2024 23 March 2024 Accepted 8 April 2024 Journal of Capital Markets Studies Vol. 8 No. 1, 2024 pp. 95-125 Emerald Publishing Limited 2514-4774 DOI 10.1108/JCMS-12-2023-0046 adoption of passive investing as an investment strategy, it is not a one-size-fits-all proposition. Market conditions change constantly, and it frequently requires an informed eye to determine when and how much to shift away from active investments and toward passive ones. Currency ETFs enable investors to implement a carry trade strategy in their portfolios; however, as a word of caution, currency stability and liquidity can play a significant role in international ETFs. Similarly, LETFs may be better suited for dynamic strategies and offer less value to a long-term investor. Lastly, the importance of investor education cannot be underestimated in the name of the highly diversified portfolio when using passive alternatives, for which necessary efforts are required by regulators and investors alike. Social implications –The inexorable trend to passive investing creates numerous issues for fund management, including fee and revenue pressure, which forces traditional managers to seek new revenue streams,suchas illiquid and private assets, which also implies increased portfolio risk. Additionally, the increased transparency and efficiency associated with the ETF market indicates that managers must rethink the entire value chain, beginning with technology and the way investments interact. Passive investments have triggered changes in market structure that are still not fully understood or factored in. Active management and a range of valuation opinions on whether a price is “too low”or “too high”provide much-needed depth to a market as it attempts to strike a delicate balance between demand and supply forces, ensuring liquidity at all price points. Originality/value –I hereby certify that I am the sole author of this paper and that no part of this manuscript has been published or submitted for publication. Keywords Passive investing, ETF, Index funds, Benchmarking, Bibliometric, Systematic Paper type Literature review 1. Introduction Globally, and particularly in developed countries like the United States, there has been a substantial shift in investor preference toward passive investing. Passive asset management, commonly known as passive investing, is an investment approach that monitors a marketweighted index (Sharpe, 1991). It can be accomplished by holding any or a combination of index funds, exchange-traded funds (ETFs), Index future contracts, Index futures options or Stock Market Index Swaps (Hasbrouck, 2003;Stoll and Whaley, 1990;Constantinides et al., 2011) Passive investing, which is most widespread in equities, is gradually becoming more popular in other investment categories such as bonds, commodities and hedge funds (Jaeger and Wagner, 2005). When compared to actively managed funds, it provides good diversification, minimal transaction costs and lower turnover (Baks et al., 2001;P ezier and White, 2008). Passive investing is founded on the efficient market hypothesis (EMH), which was developed in the 1960s and contends that shares always trade at their fair market value and that persistent alpha generation is impossible. This theory rejected the efficacy of stock selection and market timing and represented the earliest school of thought on passive investing. Index funds were introduced in the 1970s and have been restricted to large pension and social security institutions since then (Sorensen et al., 1998;Clark and Hebb, 2004;Elton et al., 2007;Ayres and Curtis, 2014). Gruber (1996) brought attention to the paradox that investors purchase actively managed funds even though they underperform index funds on average. With growing investor dissatisfaction with active fund underperformance (Sorensen et al., 1998;Malkiel, 2005;Sorensen et al., 1998) and a desire to reduce costs across social benefit schemes, the relative appeal of passive investments has increased by multiple degrees in the aftermath of the 2008–2012 subprime crisis (Elton et al., 2002). This has piqued the interest of industry, academia, and researchers alike, resulting in a slew of studies examining their performance (Avellaneda and Lee, 2010). The literature on passive investing, hence, has exploded in recent years. The testing of the EMH, the comparative performance assessment of passive portfolios to curated folios, and investor biases in passive investing have all been topics of discussion in the past (Frino and Gallagher, 2001;Elton et al.,2004;Choi et al., 2010;Guercio and Reuter, 2014; Cremers et al., 2016;Fahling et al., 2019). Multiple studies addressing various characteristics of index funds, such as fee expense (Hortacsu and Syverson, 2004;Elton et al., 2012), return JCMS 8,1 96 volatility (Goetzmann and Massa, 2003), tracking error (TE) (Meade and Salkin, 1990;Chen et al., 2006), liquidity, investor purchase and redemption patterns (O’Neal, 2004), price discovery (Chen and Gau, 2009), hidden costs (Petajisto, 2011) and portfolio allocation (Fan et al.,2016) have been conducted since the inception of index funds. Recent research on index funds has progressed to sparse portfolios (Takeda et al.,2013), goal programming (Wu et al.,2007), algorithm-assisted allocations(Schoenfeld, 2017) and financial innovations (Cremers et al.,2016). Lo (2007) integrated the EMH with behavioral finance to create the adaptive market hypothesis (AMH), which states that rational investors can swiftly become irrational in reaction to increased market volatility. In the aftermath of the US Subprime crisis, index funds were heavily criticized for causing the 2007–2008 spike in commodity futures prices, consequently, numerous studies examined the effect of index funds on the prices of underlying assets (Malkiel and Radisich, 2001;MichałFalkowski, 2011;Irwin and Sanders 2011;Ivanov, 2013;Hamilton and Wu, 2015). ETFs, which manage trillions of dollars (USD) in capital flows in developed economies, are the most recent and significant development in modern capital markets after index funds. Since their introduction, various barometers of ETF performance have been explored in depth, including TE (Johnson, 2009;Shin and Soydemir, 2010;Chu, 2011), pricing efficiency (Israeli et al., 2017) and fund flows (Clifford et al., 2014). As ETFs gained prominence, their role in price discovery and information transmission (Tse and Martinez, 2007;Levy and Lieberman, 2013;Haslam et al., 2018), volatility in prices of underlying (Gleason et al., 2004), market liquidity (Boehmer and Boehmer, 2003;Ben-David et al.,2017 ), market microstructures (Gao et al., 2018), market co-integration and error correction (Chou and Chung, 2006;Delcoure and Zhong, 2007;Broman, 2016), volatility spillover (Krause and Tse, 2013;Inci, 2018) has been investigated in detail. With growing environmental consciousness, ETF research has shifted to evaluating the efficacy of investments in alternative energy (Miralles-Quir os and Miralles-Quir os, 2019). Furthermore, inter se comparison between index funds and ETFs on a variety of criteria, including substitutability, cost structure, investor types and risk-adjusted returns have been conducted (Beneish and Gardner, 1995; Kostovetsky, 2003;Harper et al., 2006). Leveraged ETFs (LETFs) are one of the most recent financial developments in the ETF realm, and various studies have been conducted to explain this concept (Avellaneda and Zhang, 2010;Charupat and Miu, 2011). Notwithstanding economic challenges, unpredictability and an initial upheaval precipitated by the coronavirus disease 2019 (COVID-19) pandemic, the asset management sector rebounded in 2022 and produced favorable returns. The assets under management (AUM) of passive funds are projected to reach USD 34 trillion by 2025, according to the Global Asset Management Report, (2021) by Boston Consulting Group. Systematic reviews serve the purpose of identifying particular domains that necessitate further research. Additionally, they enable professionals to obtain a comprehensive understanding (Randhawa et al., 2016). Previous studies have conducted literature reviews on distinct aspects of passive investing strategies, such as fixed-income and index investing (Tang and Xu, 2017), the effects, trading, and institutions of ETFs (Madhavan, 2012;Joshi and Dash, 2024), and an overview of Indian index funds (Sarkar et al., 2013). Despite the expanding corpus of scholarly work concerning specific facets, a comprehensive overview of the overarching passive investing strategy remains extremely scarce. Our research is most closely aligned with the findings of the Fisch et al. (2019) study. In light of the market mechanism, the study offers a comprehensive analysis of the theoretical framework from institutional, policy and regulatory standpoints to enlighten passive investors. However, a review of the existing literature in this field is not included in the study. Given these overarching concerns, the expansion and development of the corpus of research in numerous disciplines emphasizes the need for a quantitative investigation to establish a comprehensive framework, identify noteworthy trends and determine directions for future research. Our study investigates the subsequent research Journal of Capital Markets Studies 97 inquiries by employing a systematic literature review (SLR) and a rigorous bibliometric analysis. RQ1. What characterizes the current research trend in passive investing? RQ2. Which sources, articles and authors are the most influential in this research domain? RQ3. What are the dominating themes in this field of study? RQ4. What has been the evolution of the conceptual and intellectual structure (IS) over time? RQ5. What is the future research scope? 2. Data and research methodology This article is the result of SLR and extensive bibliometric analysis. Contextualized SLR (Tranfield et al., 2003) is used to screen and select bibliographic data, which is then subjected to a variety of bibliometric analyses (Zupic and  Cater, 2015). Bibliometric analysis as a technique entails the application of statistical tools to the examination of the bibliographic attributes of a body of literature. We follow Pattnaik et al. (2020) as a methodical approach for data selection and research design as depicted in Figure 1. Source(s): Authors’ own work RQ1 RQ2 RQ3 RQ4 RQ5 Scientific Production – Annual, Average & Country-wise Most cited – Sources, Authors, Countries Authors’ Impact Word Tree Map, Trend Topics & Burstiness Network Analysis Scope for further research Data Source: SCOPUS and Web of Science (WoS) Acquisition of Data and Screening Topic: “Passive Investing” Timespan: 1998 to Nov 2021 Database: Scopus and Web of Science (WoS) Bibliometric Analysis and Systematic Review Bibliometrix VoS Viewer CiteSpace Tools Analysis CA/AF TA & IA B-C Co-Oc/ Co-Ci BA Research Questions Results Note(s): Abbreviations utilized: CA/AF – Citation Analysis/ Analysis of Frequency; IA – Impact Factor Analysis; B-C – Bibliographic Coupling; Co-Oc – Co-Occurrence of keywords/titles/abstracts; Co-CiCo-citation analysis of References/Sources/Authors; BABurstiness Analysis of Citation/ References/ Sources Figure 1. Data selection and research design JCMS 8,1 98 2.1 Search criteria and data retrieval The collected data adhered to a systematic research methodology that outlined the essential stages required to perform a literature review following the PRISMA framework. For the presentation of evidence in systematic reviews and meta-analyses, PRISMA is the acknowledged standard. Journals that underwent peer review were the only sources considered for this study. The evaluation process excluded reports, conference proceedings, publications and theses. Analyses of 943 articles indexed by Scopus and WoS were conducted to address the aforementioned research questions. In selecting these documents, five criteria were considered: (1) Refereed academic journals (to ensure the highest quality of refereeing), (2) Articles published between 1998 and 2021, (3) Indexed by Scopus and WoS, (4) Filtered using keywords and Boolean operators: “passive investing or passive invest*,”or “index fund*,”or “exchange-traded fund”or “ETF*”or “indexing,”; (5) The study includes all eligible non-duplicate publications in the English language that met the filtration criteria. The process of retrieving meta-data is summarized in Table 1. 2.2 Research methodology Bibliometric approaches or analyses are now firmly established as an essential component of research evaluation methodology, particularly in scientific and applied disciplines (Ellegaard and Wallin, 2015). It helps to eliminate subjective bias in qualitative literature synthesis (Nerur et al.,2008) and has been widely used in the past to analyze massive amounts of bibliographic content on topics (Blanco-Mesa et al.,2017), universities (Merig o et al., 2019), countries (Mas-Tur et al.,2019) and journals (Donthu et al.,2020). Citation and co-citation analysis are two of the most commonly used bibliographic approaches for uncovering differences in the intellectual landscapes of cited sources (Kessler, 1963; Small, 1973). Bibliometrix, VoS Viewer and Cite Space are the tools used to conduct content and network analysis and to ascertain the present state of research in this sector, as well as its focus and direction. The descriptive analysis summarizes the trend in publications and citations (Tsay, 2009). The most influential sources, articles and authors are selected based on h-index,g-index and m-index (Hirsch, 2005;Ding and Cronin, 2011). Keyword analysis is used to elucidate the study domain’s knowledge framework, emerging patterns and evolving themes (Hu et al., 2018). The conceptual structure is deduced using word-tree analysis (WTM) (Callon et al.,1983 ). Network analysis is performed using the bibliographic coupling (B-C) principle and network centrality strength to uncover interconnected communities (Bastian et al., 2009). Steps Filtration criteria Excluded Accepted Identification Record identified through database screening (Boolean Operator) 1,320 Screening Filtration on the basis of the subject (Business, Economics, Econometrics, Finance, Management, Accounting and Social Science) 308 1,012 Duplicates removed 5 1,007 Eligibility Document Type (Article and Review) 14 993 Publication Stage (Final) 10 983 Language criteria (English) 20 963 Included Based on the content 20 943 Note(s): No restrictions on the ranking of Journals were made for meta-data selection Source(s): Authors’own work Table 1. PRISMA flow diagram Journal of Capital Markets Studies 99 3. Descriptive statistics 3.1 Trend in research and scientific productivity Addressing RQ1 on the research trend in passive investment, Figure 2 shows that the number of annual publications has been increasing since 2007. To be specific, over 90% of the literature included in this study was published after 2008, implying that the majority of intellectual debates in the area of passive investment occurred in the aftermath of the 2008– 2012 global economic crisis. 3.2 Most influential authors, documents and sources This section addresses the RQ2 concerning the prominent authors, articles, and sources in the field of Passive Investing. Table 2 summarizes the most influential authors on passive investing, arranged by the number of publications; additional metrics are included in the table. Tse Y is ranked first with 14 articles between 1998 and 2001, an h-index of 9, and 241 citations. Gruber MJ is the most prominent author on passive investing, with a TC count of 1,520, followed by Irwin SH (TC: 776) and Elton EJ (TC: 667). The h-index metric measures both citation and productivity impact at the author level; Irwin SH, with an h-index of 10, g (12) and m (0.833), is the most influential author in the field of passive investment, followed by Tse Y (9, 14 and 0.474). Author Hg m TC NP Tse, Y. 9 14 0.474 241 14 Irwin, S. H. 10 12 0.833 776 12 Gruber, M. J. 8 11 0.242 1,520 11 Elton, E. J. 7 10 0.212 667 10 Sanders, D. R. 8 9 0.667 643 9 Frino, A. 6 8 0.286 178 8 Rompotis, G. G. 5 8 0.357 72 8 Ivanov, S. I. 4 7 0.364 80 7 Lee, C. C. 3 6 0.429 38 7 Xu, L. 3 5 0.6 32 7 Note(s): The table above enlists the top 10 authors contributing to the extant literature based on three distinct impact factors: h-index, g-index and m-index (h,gand mrespectively). It also presents the total citation count (TC) accredited to the author along with the number of papers (NP) by the author Source(s): Authors’own work 0 20 40 60 80 100 120 140 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total publication yearwise Source(s): Authors’ own work Table 2. Most influential authors on passive investing based on three impact factors Figure 2. Annual scientific production JCMS 8,1 100 As assessed by NP, Table 3 summarizes the top journals in the field of passive investment. The Journal of Portfolio Management tops the list with 35 contributions to the current body of knowledge, followed by Managerial Finance (NP: 28) and the Journal of Banking and Finance (NP: 25). It’s worth noting that the top ten journals account for more than a quarter (26%) of the papers examined in this study, while the top twenty journals account for almost 40% of the total articles examined. While the Journal of Banking and Finance is the most widely cited source in the domain of passive investment, according to the hand gindexes (14 and 23 respectively), the Journal of Finance (not included in the table below) ranks first with 1,684 citations using TC as a measure of influence. Publications in reputable journals demonstrate the study domain’s growth, inspiring additional research endeavors (Acedo et al., 2006). The aforementioned considerations, hence, justify the remarkable increase in research in this area. Based on the citation score, Table 4 presents the most influential papers and references on passive investing. Local citations (LCs) are based on a dataset included in the study, whereas global citations (GCs) are based on a large dataset available on Google Scholar and Web of Science. The top most influential article (GC:853) is Gruber J.’s“Another Puzzle: The Growth in Actively Managed Mutual Funds”(1996), followed by Shleifer A.’s“Do Demand Curves for Stocks Slope Down?”(1986) (GC: 589). Using LC as a metric of influence, Elton J., “Spiders: Where Are the Bugs?”(2002) ranks first (LC:71), followed by GruberJ., “Managed Mutual Funds”and Ben-David et al. (2018) “Exchange-Traded Funds”(LC: 49). 3.3 Most dominating themes in research on passive investing In response to RQ3,Figure 3 offers an overview of the thematic evolution seen in the literature on passive investing. The frequency with which keywords appear in the literature from 1998 to the current day is used to extract the most prominent themes. Time slices were created using significant economic events that affected the development of financial markets in Source Hg m TC NP Journal of Portfolio Management 12 21 0.500 498 35 Managerial Finance 7 9 0.269 125 28 Journal of Banking and Finance 14 23 0.467 555 25 Journal of Asset Management 6 11 0.462 137 19 Journal of Index Investing 1 1 0.250 5 4 International Review of Financial Analysis 7 11 0.500 129 15 Investment Management and Financial Innovations 4 7 0.250 58 11 Journal of Futures Markets 7 13 0.368 184 15 Financial Analysts Journal 9 16 0.346 311 16 Journal of Alternative Investments 3 6 0.231 120 6 Applied Economics 5 9 0.263 94 9 Applied Economics Letters 5 7 0.417 63 11 Financial Review 8 11 0.444 210 11 Journal of Empirical Finance 7 10 0.389 366 10 Quantitative Finance 4 10 0.333 156 10 North American Journal of Economics and Finance 5 8 0.625 69 11 Review of Financial Studies 7 11 0.412 376 11 Journal of Financial Markets 8 11 0.471 261 11 Journal of Wealth Management 3 4 0.273 22 7 Applied Financial Economics 6 10 0.300 129 10 Note(s): The table above enlists the top 20 sources ranked in the order of number of papers (NP) on passive investing along with total citations (TC). The source’s impact factor measured as h-,gand m-index are also mentioned in the table Source(s): Authors’own work Table 3. Most influential sources Journal of Capital Markets Studies 101 general and passive investments in particular. The first time slice, from 1998 to 2000, illustrates the closed character of financial investments before the US IT boom. With the turn of the twenty-first century and the integration of financial markets, exchange-traded funds and enhanced index funds, which seek to boost the returns produced by strict index funds, were added to the broader basket of passive investments, which index funds previously dominated. The rapid post-global financial crisis (GFC) economic recovery of the Malaysian economy [1], bolstered by robust government spending and the strengthening of foreign trade, attracted the research community’s attention, as evidenced by its inclusion in the prominent themes in the period spanning 2001–2008. Passive investments experienced Author Title Year LC GC LC/GC ratio (%) Elton et al. (2002) “Spiders: Where are the bugs?”2002 71 105 67.62 Gruber (1996) Another Puzzle: The Growth in Actively Managed Mutual Funds 1996 49 853 5.74 Ben-David et al (2017) Exchange-Traded Funds 2017 49 41 119.51 Ben-David et al. (2018) Do ETFs Increase Volatility 2018 43 82 52.44 Hasbrouck (2003) Intraday Price Formation in US Equity Index Markets 2003 39 229 17.03 Shleifer (1986) Do Demand Curves for Stocks Slope Down? 1986 37 589 6.28 Delcoure and Zhong (2007) On the premiums of iShares 2007 36 52 69.23 Tse and Martinez (2007) Price discovery and informational efficiency of international iShares funds 2007 31 52 59.62 Poterba and Shoven (2002) Exchange-Traded Funds: A New Investment Option for Taxable Investors 2002 30 71 42.25 Note(s): Table above enlists the top 10 cited documents on passive investing along with the local citations (LC) and Global citations (GC), author(s) and year of publication for the respective documents Source(s): Authors’own work Table 4. Most influential articles Figure 3. Thematic evolution in passive investing research JCMS 8,1 102 restricted passive portfolios, smart beta strategies, alternative energy and ESG investment in general gives further scope for research. Cluster 7: varying composition of underlying indices A total of 24 studies examining changes in the composition of broad market indices such as the S&P 500, the Russell 2000, the FTSE100, and the DJIA, as well as the associated price effects, form the heart of this cluster, which spans over 2 decades (1994–2018). Index funds, ETFs and other passive funds collectively represent a sizable and important institutional investor class for stocks trading on global stock markets. Any change in the composition of the larger indices tracked by index funds and ETFs causes rebalancing of index fund portfolios and so affects returns (Shleifer, 1986;Lynch and Mendelhall, 1997;Chen et al., 2006), providing vital insight into market efficiency (Madhavan, 2003). This effect could be transient, consistent with the price pressure hypothesis (Woolridge and Ghosh, 1986;Vespro, 2006), or it could be permanent, consistent with Scholes’s (1972) price shift followed by considerable abnormal trading volume, confirming downward-sloping demand curve hypothesis (Biktimirov, 2004). Beneish and Gardner (1995) suggested that information symbolism, price pressure, imperfect alternatives and information cost could all be explanatory variables for the stock market consequences of DJIA revisions. On the other hand, Malkiel and Radisich (2001) find no evidence that indexing has a persistent effect on the pricing of securities. According to Masse et al. (2000), the information content of inclusion does not fully explain the share price response. Numerous studies examined the effect of changes in the composition of market benchmarks on stock betas (Hau, 2011), the liquidity provision of index funds (Green and Jame, 2011), the demand for component stocks (Kappou et al., 2010), and the home currency (Hau et al., 2010). On the day of index inclusion, NYSE equities saw less severe price effects than NASDAQ stocks, demonstrating the superiority of the expert system over the dealer system in minimizing price effects (Elliott and Warr, 2003). Cluster 8 and 9: contribution of passive investments to market volatility This cluster focuses on the impact exerted by passive investments on market volatility, which is fueled by both misguided investor decisions and ETF market action driven by arbitrage. This cluster is comprised of 17 articles dating from 2002 to 2018. Herding behavior has been extensively studied during periods of market stress and volatility, and momentum flows during these periods are significant for securities pricing (Goetzmann and Massa, 2002). Investor behavior, on the other hand, is not symmetrical between bull and bear markets (Gleason et al., 2004;Gopane et al., 2023). Stocks with a higher proportion of ETF ownership exhibit much more volatility, which adds another layer of non-diversifiable risk to stock prices (Ben-David et al., 2017). Increased ETF ownership is accompanied by increased trading costs, diminished information acquisition benefits, and an increase in voluntary disclosures (Israeli et al., 2017;Schoenfeld, 2017;Lin et al., 2018). ETFs, hedge funds and other institutional investors provide aggressive liquidity at competitive prices (Aitken et al., 2007). Index funds have been implicated in causing the asset price bubbles and ensuing financial crisis. With the growing popularity of passive investing, the situation is likely to deteriorate further due to increased financialization via ETFs and high-speed automated algorithmic trading, as well as accumulating unfunded obligations (Sornette and Cauwels, 2014). However, the magnitude of the crash is highly dependent on the proportion of uneducated investors and the amount of unsophisticated passive investing in the market (Barlevy and Veronesi, 2003). The effect of stock inclusion in ETFs on price correlation and stock betas remains largely unknown in the EME environment, despite rising cross-sectional commonality in equities. This also highlights the importance of developing innovative risk management solutions. Journal of Capital Markets Studies 109 Nineth cluster is the smallest cluster, consisting of three publications that make significant contributions to the literature on the dynamic role of passive investments in global financial markets. With the growing popularity, passive investments account for a sizable portion of the total AUM in the developed markets. These funds are ready to amass massive positions as their combined ownership in the most widely followed broad indices such as the S&P 500 and DJIA continues to grow at a breakneck pace (Bebchuk and Hirst, 2019). Three megafunds in the United States control more than 40% of voting rights in companies listed on S&P and dominate the broader index. Their full potential is anticipated to manifest itself in the shift to sustainability, with passive management eclipsing active fund management in socially responsible investing (Chen and Scholtens, 2018;Fisch et al., 2019). The extent to which passive funds contribute to ESG objectives remains an unanswered question. 4.2 Conceptual analysis The conceptual model illustrated in Figure 6 summarizes a thorough content study of the literature in nine bibliographic clusters. The structure largely illustrates the various antecedents of passive investments and their impact on two major performance attributes, with liquidity, degree of financialization and capital flows serving as mediating factors. Bidirectional arrows suggest potential endogeneity in financial variables, while the link denotes the nature of the relationship studied in the available literature. The investors’rationale for choosing active funds despite their historical underperformance in comparison to passive benchmarks and index funds has been constantly scrutinized (Goetzmann and Massa, 2003;Lichtenstein et al., 1999;Fortin and Michelson, 2005;Boldin and Cici, 2010). Passive funds are intended to replicate a market-linked benchmark, and deviations from the benchmark define tracking efficiency (Johnson, 2009;Chu, 2011;Rompotis, 2011). Transitions in the macroeconomy dictate market regimes. Furthermore, market volatility is substantially influenced by corporate actions, including investor disclosures and expanding ICT penetration. Expansionary developments tend to generate more pronounced surges, as forecasting errors escalate (Lunde and Zebedee, 2009;Nguyen et al.,2007;Aggarwal et al., 2014). The market for passive investments reflects the cumulative impact of these forces in three broad dimensions: Market liquidity, Capital Flows and Degree of Financialization. Although the term “financialization”began to appear with increasing frequency in the early 1990s, its origins remain elusive. However, since the late 1960s, the fundamental issue of a gravitational movement toward finance in capitalism as a whole has existed. Financialization essentially implies the increasing role of financial motives, financial markets, financial actors, and financial Figure 6. This figure represents the conceptual structure developed based on analysis of the content of passive investing literature JCMS 8,1 110 institutions in the operation of domestic and international economies. This equally holds for passive investments. ETFs, the most popular passive alternative, allow for secondary market trading. Authorized participants’in-kind redemption and creation processes result in price discovery in ETF markets, defining the pricing efficiency (Shanmughama and Zabiulla, 2012;Petajisto, 2017). The market’s liquidity (Ackert and Tian, 2008), as well as overall volatility, determine the success of in-kind creation and redemption processes, thereby influencing the degree of financialization (Irwin and Sanders, 2011,2012;MichałFalkowski, 2011;Ivanov, 2013). With the financial markets landscape evolving, contemporary issues such as the impact of ICT and social change on ETF performance (Lechman and Marszk, 2015), international diversification (Huang and Lin, 2011) and emerging economies perspectives (Blitz et al., 2012) have become research focal points. Passive investments are gaining popularity and are establishing a dominant position as a source of investible surplus. ETFs have been instrumental in reducing market volatility (Lin and Chiang, 2005) and increasing liquidity (Hegde and McDermott, 2004;Ben-David et al., 2017), and are now the primary source of price discovery (Ivanov, 2013), resulting in long-term convergence of stock betas (Sullivan and Xiong, 2012). Madura and Ngo (2008) concluded that ETFs had a sizable and beneficial effect on the valuation of their constituent equities. Petajisto (2011) coined the term “index turnover cost”to examine the effect of ETF price deviations on investment behavior. Charteris et al. (2014) concluded that ETF discounts/premiums encourage feedback trading, whereas Da and Shive (2018) concluded that correlations between ETF returns and stock-lagged beta provide evidence for price reversal. This also reflects the endogeneity of variables such as liquidity, capital flows and financialization degree. 5. Limitations While the study contributes significantly to the field of knowledge, it has several limitations that must be considered when interpreting its findings and implications. With our emphasis on academic journals, the study analyzed only peer-reviewed journal articles, excluding conference papers, reports, and technical articles. As a result, contributions published in other formats that had an effect on the body of knowledge are excluded. Additionally, our keywordbased approach to article selection may introduce subjectivity bias into the process. While we are confident that our approach resulted in a comprehensive and representative database, our reliance on Elsevier Scopus and Web of Science may have resulted in us overlooking relevant work that is only accessible through other databases. Additionally, specific bibliometric properties may not be time-stable, and certain common distribution patterns of the passive investing literature may still be developing. Furthermore, it is worth noting that the graphs and citation networks were interpreted subjectively. With passive investing’s growing popularity and the number of publications at an all-time high, it’s clear that intellectual debate in this field has not yet reached saturation. As a result, the study’s findings may not be exhaustive, and there is considerable room for additional research, as detailed in Sections 6 and 7. 6. Research implications With this study, it has been possible to observe and chart the high growth trajectory of passive investing research globally, especially post-US Subprime crisis. The phenomenal growth story of passive investments may be attributable to increasing investor dissatisfaction with active investing which comes at a higher price. The findings of our study have key implications for various stakeholders: investors, regulators and managers, these are discussed in detail below: Journal of Capital Markets Studies 111 6.1 Implication for investors Despite the widespread adoption of passive investing as an investment strategy, it is not a one-size-fits-all proposition. Market conditions change constantly, and it frequently requires an informed eye to determine when and how much to shift away from active investments and toward passive ones. Active managers may outperform more frequently than passive managers in volatile markets or when the economy is weakening. On the other hand, passive strategies may be preferable when the index’s constituent securities move in lockstep or when stocks have more consistent valuations. Depending on the opportunity in different sectors of the capital markets, investors may gain from a combination of passive and active techniques. While active investing may be more profitable in cases where international diversification is required, such as investing in emerging market stocks, passive investing may make more sense in the domestic investing landscape. Additionally, an active fund manager may be better suited to manage a portfolio of illiquid securities or one that is tailored toward a specific objective, such as limiting the downside risk. It’s also worth noting that investors, on average, place a higher premium on risk, return and liquidity than on cost. This is especially true for those with high net worth who have access to private equity, hedge funds and other curated alternative investments. While investing in ETFs, investors should bear in mind the effect of market regimes on TE, as deviations from the benchmark typically increase more during bearish than bullish regimes. Currency ETFs enable investors to implement a carry trade strategy in their portfolios; however, as a word of caution, currency stability and liquidity can play a significant role in international ETFs. Similarly, LETFs may be better suited for dynamic strategies and offer less value to a long-term investor. Lastly, the importance of investor education cannot be underestimated in the name of the highly diversified portfolio when using passive alternatives, for which necessary efforts are required by regulators and investors alike. 6.2 Managerial implications The inexorable trend to passive investing creates numerous issues for fund management, including fee and revenue pressure, which forces traditional managers to seek new revenue streams, such as illiquid and private assets, which also implies increased portfolio risk. Additionally, the increased transparency and efficiency associated with the ETF market indicates that managers must rethink the entire value chain, beginning with technology and the way investments interact. ETFs outperform closed-ended funds in terms of tracking ability. Both, however, exaggerate their reactions to domestic news. Index funds may be more suitable for international diversification. According to the research, ETF discounts and premiums promote feedback trading, which may result in panic redemptions during times of market stress. Additionally, managers must develop novel risk management strategies to reduce their reliance on cash holdings, which are a major cause of portfolio TEs. This is truer than before with the more integrated character of the world economy necessitating quicker portfolio realignments as indices reel under pressure. ETFs are now at the forefront of price discovery, and managers must adopt better volatility metrics that take macroeconomic and investment disclosure factors into account. Algorithmic approaches and bootstrap aggregation (Bagging) with superior predicting abilities may prove to be more effective in this area. With increasing sustainability and environmental concerns; however, ETFs are set to overtake active funds in the fulfillment of ESG objectives. 6.3 Implications for regulators The passive investing phenomenon has shaken the financial industry by assuming dominance on the most closely followed global indices, which contradicts the tenet of JCMS 8,1 112 diversification. Passive funds are now having an impact on the creation and composition of the indices they were designed to follow, as trackers’holdings exercise significant influence over voting rights and flow momentum. Passive investments have triggered changes in market structure that are still not fully understood or factored in. Active management and a range of valuation opinions on whether a price is “too low”or “too high”provide much-needed depth to a market as it attempts to strike a delicate balance between demand and supply forces, ensuring liquidity at all price points. Passive investments, on the other hand, have a straightforward mandate of buying on fund inflows and selling on fund outflows. If passive investments were to dominate, markets would be shallow, with liquidity available only to the extent that prices remained constant. Beyond the current price, the presence of bids and offers rapidly diminishes, increasing the risk of stocks being locked limited up/down and liquidity evaporating as price changes increase in magnitude. As previously stated, NYSE equities saw fewer price repercussions than NASDAQ equities during the index inclusion process, demonstrating the superiority of expert systems over dealer systems based on machine learning. Thus, with passive investing assuming a large role in the financial landscape, regulators will need to devise novel monitoring and discrepancy detection approaches in addition to reinstating a focus on investor education. 7. Conclusion and future scope The study’s objective is to synthesize available knowledge about passive investing and to highlight innovative advancements in this field on a worldwide scale. We analyzed 943 research publications (published between 1998 and 2021) and provided a thorough overview of the characteristics that determined the expansion of passive investment as a result of the twin benefits of diversity and low cost. The collection of studies has major managerial implications, particularly in terms of portfolio allocation, trading methods, price discovery and subsequent investment behavior. As detailed in the cluster analysis section, passive investment has become a dominant force in global financial markets, with passive funds together controlling more than two-fifths of the voting rights in the world’s most widely tracked equity indices. ETFs, the most recent financial innovation in passive investing, are currently at the forefront of price discovery. With the increasing popularity of digital platforms, high-frequency trading and market interconnectedness; the impact of market regimes, microstructures and macroeconomic developments on underlying indices and stocks may define fund managers’portfolio optimization strategy. Managers must be alert and creative in weighing the costs and benefits of various options to maximize the performance of their portfolios. Furthermore, this research summarizes the available literature in terms of publication date, citations, geographic scope, intellectual environment, theories applied and research procedures. Additionally, this paper discusses some of the research issues associated with passive investing and suggests future research opportunities in this emerging field of study. Future studies pertaining to the clusters under consideration may be guided by the findings gathered in this study. The effect of contemporary trading platforms and algorithmic trading on price volatility, price formation and liquidity in ETF markets is a relatively uncharted territory within the broader category of market structures. The impact of behavioral characteristics on mispricing, future prices, risk premiums and market efficiency are all aspects that deserve attention within the pricing and market efficiency cluster. Although the number of empirically tested and generalizable studies is on the rise, further research in this area is required. Given the increasing significance of developing nations in international financial markets, there are potential areas for further academic investigation within the portfolio strategies cluster, including the impact of stock inclusions in ETFs, price correlations, stock betas and the variable composition of the indexes Journal of Capital Markets Studies 113 tracked by these funds. Given the heightened awareness surrounding climate risk and sustainability, any discourse concerning ETFs as an alternative investment strategy must also consider the emergence of ETFs with an ESG focus. This represents a substantial aspect that merits further research, especially within the EME context. Notes 1. The Malaysian government executed an initial monetary and fiscal stimulus package totaling RM 7 billion (USD 0.98 billion). This was succeeded by a more comprehensive stimulus package of RM 15 billion (USD 2.1 billion), which invested in locally-oriented initiatives with multiplier effects and accounted for nearly 9% of the country’s GDP. In addition, tax incentives, private finance initiatives, and off-budget ventures were incorporated into the package. The stimulus package was the most comprehensive in the annals of the nation’s economy and ranked second among ASEAN nations, behind only Singapore. 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Corresponding author Priya Malhotra can be contacted at: [email protected],[email protected] For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] Journal of Capital Markets Studies 125