But then, say you come a long with a new company going public... you're not large enough to be in the S&P 500, so if everyone only invests in S&P 500 index funds, no one will buy your stock.
Similarly, if you're Apple (the largest company), and you have a really bad quarter, say you lose $100B, no one would sell your shares, because they're passive investors.
Obviously, these are edge cases (we'll never be 100% passive), but there is some concern that there will be a lock-in effect for companies currently in the S&P... It will be harder to grow if you're not in it, and it'll be harder to fail if you are.
It's a perfectly valid question. In my very cautious humble opinion, I think what it means is that the style/size matrix[0] will get squeezed more into a single spectrum: large companies will be pressured into stabilizing and delivering dividends and small ones will compete to grow large enough to get a piece of the passive investment gravy train. Apple can have a bad quarter, but it's just one company. It can't keep having a bad quarter. And if they start to and have to downsize to stay alive, they would by doing that hasten themselves out of a market cap that would qualify them for the index.
There's also no reason why passive indices have to reflect the total market weighted for market cap.
As per the article, Vanguard's biggest fund is the Vanguard Total Stock Market Index which tries to track the CRSP U.S. Total Market Index. That index is "Nearly 4,000 constituents across mega, large, small and micro capitalizations, representing nearly 100% of the U.S. investable equity market." I don't think you have to worry much about a bifurcation between large and small companies. My worry would be that the "investable equity market" is shrinking and that most the growth in the future will come from companies pre-IPO where non-accredited investors cannot invest.
The number of total publicly traded companies isn't projected to get anywhere close to historical levels in the near future. There are steps being considered to change the current definition of accredited investors and/or to permit non-accredited investors to participate in private investments. See helpful reading/viewing:
Obviously, these are edge cases (we'll never be 100% passive), but there is some concern that there will be a lock-in effect for companies currently in the S&P... It will be harder to grow if you're not in it, and it'll be harder to fail if you are.