"Indexing has dramatically affected the market. The S&P 500 stocks are selling at a very high historical multiple. One of the reasons is that money is being funneled into S&P 500 Index funds," says Jay Evans, Portfolio Manager of the Galaxy Large Company Index Fund.

There has been a long-standing debate on whether indexing affects securities prices. Conventional wisdom has held that the share of index fund assets is too small to have any consequential effect on prices. George U. Sauter, Managing Director of Vanguard Core Management Group says in his interview that appears in the Spring 1999 edition of "In The Vanguard",

"S&P 500 indexing should have the same impact on all stocks in the index. But the reality is that the largest stocks within the S&P 500 have performed much better than the small stocks in the index, and the largest stocks outside of the S&P 500 have been performing right in line with the same size stocks inside the S&P 500. That just cannot be explained by indexing."

Although index funds account for just 7% of mutual fund assets, their share has been increasing over the past few years. As investors plow money into index funds, there will be more money chasing the stocks that comprise the indexes, that will boost the prices of those stocks, and that will boost the indexes. It's simple demand and supply. "The amount of money put into indexes does influence performance," says Peter di Teresa, stock fund analyst at Morningstar.

"The knock is that index funds are a perpetual investment machine, mindlessly buying the stocks that constitute the index, so as cash rolls in, the index moves higher, without regard for the prices being paid," says Daniel Kadlec in his Time Magazine article, "Stop Bad Mouthing the Index Funds".

S&P 500 Index funds have been the most popular over the years accounting for almost 80% of all indexed assets. There are small-cap index funds too but they have not attracted much attention. The main reason for this has been the superlative performance of large-cap stocks over the years. Some believe that the flow of cash into these funds has likely helped to underwrite the performance of the component stocks.