By now it has become common knowledge that in the ongoing war of attrition between expensive – but very much underperforming under central planning – active investing and cheap and efficient passive, ETFs, the latter are winning and the former will likely concede majority control of market AUM in just over a year.

Furthermore, as BofA notes, US trading volume (as of late summer 2016) was 24% exchange traded funds (ETFs) and 76% single stocks versus 20% ETFs and 80% single stocks three years ago. By now ETFs are likely responsible for 30% of trading volume or much more.

However, it is far less known that as “active” loses market share, “passive” has become a giant force in the overall market, and as of 2016, the percentage of S&P 500 market cap held by Vanguard alone has doubled since 2010. At this rate, ETF-giant Vanguard alone will own 10% of the entire market by the end of the decade.

Unfortunately, this unprecedented dominance by investment vehicles that merely reflect flows and not fundamentals, means that the market is becoming increasingly fragile, inefficient and broken, something which can be seen in the excess volatility (measured by both standard deviation & price declines) of stocks with a larger proportion of shares held by passive investors.

Yet while in the US ETFs are yet to dominate the market, resulting in even greater systemic fragility and irrationality, this is already the case in Japan, which like with QE and NIRP, has been the guinea pig for countless monetary and market experiments.

Just like in the US, there is a tangible reason why the flows into Japan passive investing have been massive: active managers suffered outperformance rates 12ppt lower between 2014-2016, a period in which passive inflows were accelerating vs. over the prior decade (34% of funds outperforming the TOPIX between 2014-2016 vs. 46% outperforming between 2002-2013).

As a result, in Japan passive funds are now two-thirds of total….