Buying an Index Fund Isn’t as "Passive" as You Think

Mark Nicholas
Apr 23
2 min read

“Just buy the index,” they say. It’s simple. It’s cheap. It’s wise.

And in many cases, that’s true. Index funds can be excellent tools. But here’s the surprising twist: even “passive” investing requires active decisions. And those decisions can have big consequences.

If you think index investing means you’ve opted out of all the decision-making... think again.

Picking Your Index: More Active Than You Realize

There’s no such thing as the index. There are hundreds of them — each built with different assumptions, rules, and intentions. Take a few examples:

S&P 500: Tracks 500 large U.S. companies, selected by a committee based on profitability, liquidity, and size.
Russell 1000: Includes the largest 1,000 U.S. stocks by size, with no human committee involved.
MSCI EAFE: Tracks large and mid-sized companies in developed countries outside the U.S. and Canada.
CRSP U.S. Mega Cap Growth Index: Wait, what? That’s real. It tracks the largest growth-oriented U.S. companies — think tech giants — and excludes the rest of the market entirely

That last one sounds oddly specific, doesn’t it? That’s because it is. Indexes aren’t handed down from Mount Finance. They’re built by people — often to reflect an investment thesis. And many are constructed to look passive while quietly executing an active strategy: focusing on fast-growing companies, filtering by volatility, or tilting toward certain sectors.

So the very first step in “passive investing” — choosing your index — is an active choice. One that reflects your views on what parts of the market matter most.

Weighting: Who Gets the Biggest Slice of the Pie?

Most index funds — especially those tracking popular indexes — don’t invest equal amounts in each company. Instead, they give more weight to companies that are bigger based on their total stock value (that is, price per share times number of shares).

That means Apple, Microsoft, and Nvidia dominate many major indexes because their total value is massive. In contrast, a smaller company like Clorox might make up a tiny fraction, even if it's been reliably profitable for decades. This feedback loop creates upward pressure on the biggest names — not necessarily because they’re undervalued or growing fastest, but simply because they’re already big.

It’s a bit like a popularity contest where the most popular kids keep getting invited to more parties... just because they’re popular.

Other indexes flip the script:

Equal-weighted indexes give every company the same slice, regardless of size.
Fundamental indexes weight by company profits, revenue, or dividends instead of stock price.
Custom indexes might deliberately overweight certain sectors or investment styles.

Each approach has pros and cons, but none are truly neutral. How the index assigns weight is a critical — and very much active — investment decision.

Final Thought: Passive ≠ Thoughtless

Passive investing has earned its place. But “passive” doesn’t mean hands-off or consequence-free. There’s structure behind that simplicity — and human judgment behind that structure.

So before you “just buy the index,” ask: