If I am right - Pipes isn't talking about the nature of how...

If I am right - Pipes isn't talking about the nature of how units are both created and sold. He is talking about the fact all passive funds are wholly reliant on active buyers and sellers determining what in fact constitutes the index. That is, making sound decisions on the fundamentals of a business.

And he is absolutely right. It's something that is always overlooked by those who espouse the "the market is efficient" or somehow removed from the underlying process of price discovery and index inclusion/exclusion.

The reason index tracking is so efficient is because it relies on (steals essentially) the efforts of every active investor who seeks to value a company. Without this the system simply doesn't work.

For the life of me, I can't work out why there is commonly held belief index funds operate in isolation. To illustrate this, you only have to look at the work of Bogle and those who implemented the index phenomenon.

The best analogy is this. You invest with a manager you are bound by their best ideas. If you invest in the index you are piggy backing the best ideas of every participant, manager and investor in the market.

Is the process fair? Good question.

All I know is the people who are fan boys/girls of passive, always overlook the importance of active investors.

And those who denigrate passive investment, as some on here, have no idea what makes the investment case so compelling, and reliable. Even in down markets - which is often falsely described as their downfall.

Anyone who tries to convince you that one is superior than the other is usually worthy of suspicion. Both have valuable roles to play.