It’s been a long time coming – passive funds’ meteoric surge over the past decade has led to passive funds officially eclipsing actively managed ones in terms of total money managed. According to a Morningstar report published this past August, passive US equity fund assets have overtaken actively managed U.S. equity mutual fund assets for the first time in US history.

Passive investing is a long term investment strategy that includes minimal buying and selling of stocks. The most common form of passive investing typically includes index investing – investments tagged to indexes such as the S&P 500 or the Dow Jones Industrial Average. In more recent years,exchange-traded fund’s (ETF) have also become an incredibly prevalent medium for passive investing. ETF’s are a group of securities, such as stocks or bonds, that are traded similarly to the way a stock is. They’re designed to mirror the overall return investors can expect if they simply bought the entire exchange.

By contrast, active investing is the continuous buying and selling of assets that looks to take advantage of market inefficiencies. Active managers are constantly scouring the markets to find mispriced stocks that they believe will increase in price. Active investing would typically take form in the buying and selling of individual stocks rather than index funds or ETF’s. While passive investors seek to mirror the overall market average return by building a portfolio of stocks that mirrors an entire index or exchange, active investors seek to beat the market average by only investing in individual stocks that they believe will increase in price.

While many tend to associate individual stock picking as the predominant medium for money managers seeking investment opportunities, passive investing has overtaken the market in an incredibly short period of time – the first index was only created in 1976 and in 2007, passive funds made up only 20% of the market. What has caused this investment strategy to become so popular in such a short span of time?

In response to the Great Recession, a growing number of investors have continued to lose faith in money managers to outperform the market. Active managers, that claim to be able to beat the market average using their own market savvy, couldn’t avoid losing money during the recession. As a result, many investors have started to question whether these active managers can truly be relied upon to beat the market. As a result, investors have turned to passive investing as a safer more reliable investment strategy. A recent Morningstar report states that every year since 2006, money has continued to flow out of active equity and into passive equity.

The rise of passive investing can also be attributed to the low cost of overseeing and operating passive investments. Quartz reports that the fees for the most popular passive index funds are approaching zero which in turn, allows passive investment strategies to be more cost-efficient than active ones. It’s possible for fees to be this low due to economies of scale. Fees have been able to become this low in large part due to economies of scale. Large asset management firms who manage trillions of dollars – such as Vanguard or Fidelity – can afford to set incredibly low fees as these fees will still cover their costs. And, because passive investors don’t try to beat the market average by expending labor to find individual investment opportunities, they have fewer labor costs as well. Even when active managers beat the market, their net return is lower than the market average due to the fees they charge for finding individual investments.

While some view passive investing as a more safe and cheap mode of investing, others – such as Michael Burry, who famously made a fortune by betting against the housing market before the Great Recession – are growing increasingly wary of this trend. Burry, who was portrayed in the 2015 film The Big Short – is wary of the increase in popularity of passive investing as he believes there are parallels between passive investing and collateralized debt obligations (CDO’s) the high- risk securities responsible for the financial crisis. In an extensive interview with Bloomberg, Burry claims that index funds distort stock and bond prices similarly to the manner in which CDO’s did for subprime mortgages. One of the major parallels Burry sees between these two trends is the manner in which the prices of these two respective assets are being evaluated. Rather than being set by fundamental security- level analysis, the prices of index funds are being dictated by large quantities of capital flow supported by models.

Another issue Burry sees with passive investing is the liquidity risk associated with the thousands of low value and lower volume stocks that are linked to these indexes. For the financial market’s most popular indexes – such as the S&P 500 and Russell 2000 – stocks that are included within these indexes are being traded at a fraction of the volume that are traded within their respective indices. Burry finds that “the distribution of daily dollar value traded among the securities within the indexes the mimic” is a major issue with virtually all passive fund indexes as he goes on to say, “The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”

While Burry reminds uncertain of the timeline in which a potential crash could occur, he is becoming increasingly more concerned with the ramifications given the longer this trend continues: “Like most bubbles, the longer it goes on, the worse the crash will be.”

Generally speaking, in terms of passive investing as a concept as well as public outlook, it certainly appears to contain many of the attributes of a bubble: a seemingly risk-free investment strategy with very little discussion occurring regarding potential risk. As investors continue to shrug their shoulders, time will tell if passive investing is as reliable as it seems.

The stock market has always been about using your knowledge and skills to accomplish returns. You buy stocks that you think are undervalued and you short stocks that you think are overvalued, and you either make money if you are right or lose money if you are wrong. However, since the 1990s, a new method of investment has been growing at a steady pace, one that uses as little of your knowledge and skills as possible. Passive investment, a strategy that aims to be the market rather than beat the market, has consistently beaten active investment in returns over the past decade. While the current market environment might suggest that passive investment is a superior approach to active investment, it does not cover all the uses that active investment has and, given enough market power, can create its own unique complications.

Rather than the traditional method of active investment, where one picks individual stocks to buy or sell, passive investment involves using an index or a collection of stocks, commonly known as a basket of stocks, to replicate the market portfolio. The advantages of passive investment are largely due to diversification, lower turnover and lower transaction costs. With a basket of stocks, one naturally has more diversification due to the inherent diversity of a basket replicating the market portfolio. Likewise, in tracking the market return, one does not need to constantly adjust his or her position in the market. Therefore, one does not need to worry about the transaction costs that come with adjusting one’s positions. Fundamentally, passive investment on average is more self-sufficient than active investment.

These advantages have allowed passive investment to consistently pull ahead of active investment. While active investment offers the possibilities of higher returns as opposed to passive investment’s restraint by the market return, active managers must reach a return greater than the market combined with their increased transaction costs. Active investment’s required return increases have been difficult to overcome. The Financial Times reports that, within a 10-year period, 83 percent of active funds in the U.S. fail to match their expected returns, 40 percent are terminated and 64 percent move away from their original styles of investment. Passive investment’s lower transaction costs have allowed it to offer a better risk return tradeoff than active investment.

While passive investment has consistently outperformed active investment, it cannot do everything active investment can. In order to keep low transactions costs, most indexes cover only large cap stocks to maintain low turnover. Because of this constraint to large cap stocks, passive investment leads to several types of risk. Passive investment is subject to the risk of large cap versus small cap stocks — a bull market in small cap stocks or a bear market in large cap stocks could put active investment returns ahead of their passive counterparts. Because it uses only large cap stocks, passive investment tends to follow the business cycle; in times of growth, returns on indexes are great, but recessions could easily inhibit passive investment. Time frames also matter. Passive investment cannot deliver the short-term returns of active investment, and it requires time for any market fluctuations to correct.

An increase in market power of passive investment funds may also cause certain unexpected problems. With an increase in the amount invested in indexes, the expectation is that this would cause increased correlation between stocks in different indexes. Likewise, an individual stock’s characteristics, such as membership in indexes or presence in exchanges will gain more importance in valuation over a firm’s operations or overall health.

Another issue is the measure of performance. A team from Goldman Sachs argued that stock returns and dividends are becoming increasingly inefficient measurements of performance due to the lower turnover of passive investments. With passive investment, returns and dividends are not solely determined by firm decisions. Boards must differentiate the “characteristic-driven” or “flow-driven” movements within their stock from fundamental ones in order to “better evaluate underlying corporate performance.” The team suggests that other measures, such as cash returns on investment or return on tangible equity, are more comparable across firms and better evaluate a firm’s health. Without taking these issues into consideration, passive investment can easily flip in performance given enough time.

The previously mentioned problems appear when passive investment gains a significant enough share of the market, and the evidence indicates that we are moving in that direction but are not quite there yet. According to Morningstar, an investment research firm, approximately $9.3 trillion is currently invested actively compared to the $5.5 trillion passively. However, those numbers have been shifting steadily. In 2016, Morningstar also reported that active funds experienced outflows of $285.2 billion while passive funds experienced inflows of $428.7 billion.

On the other hand, a study by Schaeffer’s Investment Research, a market information services and research firm, found, on average, stocks added to the NASDAQ 100 Index underperformed and averaged negative returns over the next year while stocks removed outperformed the index in the short term and stayed relatively on pace with the index in the long term. While the average returns of stocks removed from the NASDAQ 100 may be skewed due to data being limited to only stocks that were not bought out or did not go bankrupt, the underperforming average returns of stocks added to the index does imply an overvaluation. The overvaluation in this case suggests that investors have excessively optimistic expectations about stocks joining the index. In other words, investors on average overestimate the effect joining an index has on returns. The evidence signifies that passive investment has room to grow before their market power becomes a problem.

While the influence of passive investment has been increasing, it is not as large as expected. There has been no evidence that active investment on average will offer higher returns than passive investment within the near future. Even in the presence of a bear market, data shows that recessions affect active investment just the same (if not more) as they do passive investment. However, if passive investment gains enough steam with no change in structure, it is highly unlikely that passive investment will be able to maintain the success it currently has.