In periods of economic weakness, value stocks will outperform. If active managers had any particular skill in predicting the market's future, index funds would not outperform so consistently, and would not be so popular. If financials were to suffer through a severe bear market, value managers would struggle against the index. Indices were created as benchmarks for active managers, and therefore they simply reflect the market the managers track. In fact, when active managers are said to be over or under weighting a particular sector, it usually means they have a greater or lesser exposure than their benchmark index.
Index funds have considerable latent capital gains.
If these funds experience large redemptions, investors would get hit with a big tax bill. This criticism is often pointed specifically at a group of very large and very old index funds, such as Vanguard Index 500. Since the Vanguard 500 is the oldest index fund, it is safe to say that other index funds could theoretically handle at least a similar level of redemptions. Indexing is a self-fulfilling prophesy, which will ultimately turn against itself. Actually, the investment in index funds is probably not that significant.