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BHP Group Surpasses Commonwealth Bank: The Impact of Passive Investing on the ASX
This week, BHP Group (BHP) has reclaimed its position as the largest company on the Australian Securities Exchange (ASX) by market capitalisation, overtaking Commonwealth Bank of Australia (CBA). The lead for the top spot has shifted frequently in recent years, particularly notable in late 2025 when CBA experienced a significant rally that propelled it to the forefront of the market.
The fluctuations between these two giants can largely be attributed to the increasing global appetite for commodity stocks and, more importantly, the influence of passive investing flows.
Understanding Passive Investing
Passive investing is a straightforward strategy aiming to replicate, rather than outperform, market returns. This approach predominantly employs index-tracking funds, such as exchange-traded funds (ETFs), which encompass a diverse array of shares. Many Australians participate in passive investing via their superannuation funds, which favour diversification, low costs, and long-term growth instead of active stock selection.
A closer examination of the effects of passive investing flows reveals their considerable impact on the ASX’s leading blue-chip stocks.
The Growing Influence of Passive Flows
Firetrail Investments estimates that passive investors account for approximately 45% of the Australian share market—an extraordinary figure compared to a decade ago. The ASX reports that around AUD 783 million flows through passive funds daily, making up nearly 12% of total daily turnover. The ownership of exchange-traded products surged by 27% last year, with a fourfold increase since 2020.
This growth means passive investing is no longer a peripheral component of the market; it is now a fundamental structural feature.
The essence of passive investing dictates that fund flows regulate trading activity. When money is funneled into index-tracking funds, managers are required to purchase stocks in alignment with their index weights, and conversely, sell when money leaves. In Australia, this generates significant and mechanical movements into and out of ASX-listed companies, often regardless of individual earnings perspectives or company valuations.
The Disconnect Between Flows and Fundamentals
The concentration within the ASX creates a scenario where passive investments continually direct funds towards a limited pool of blue-chip stocks, which may lead to inflated valuations based solely on their size and weight within the index.
Two pertinent examples illustrate this phenomenon:
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CBA’s Bull Run: CBA experienced a remarkable rise in share price during 2024-25, largely driven by fund flows rather than underlying fundamentals. Analysts observed that CBA’s stock became overvalued against its growth expectations. After reaching a peak, CBA’s share price plummeted by about 27% since June 2025, underperforming the ASX 200 index significantly. This instance exemplifies how passive investment flows can elevate a stock’s price and subsequently damage investors when corrections occur.
- BHP’s Ascendancy: BHP, benefiting from a boom in commodity prices, has strengthened its market position as commodity stocks attract passive investments. However, if these inflows reverse, a downward spiral may ensue as funds are withdrawn, amplifying volatility within commodity-linked stocks.
The Effects of Index Rebalancing
Passive investing also tends to concentrate volatility around specific events, particularly during index rebalances when large trades are executed swiftly, resulting in price swings unrelated to the actual performance of those companies.
The Role of Active Managers in Price Discovery
Despite the dominance of passive investment, active managers still play a vital role in price discovery. However, with active management coming under increasing pressure—71% of Australian active funds reportedly underperformed the market during the first half of 2025—there’s a risk that fewer marginal price setters may distort true market values.
Evaluating Passive Investment Exposure
Most Australians engage in passive investing through superannuation, a retirement savings pool valued at around AUD 4.66 trillion as of late 2025. Default “Balanced” options make up a significant portion of these funds, which typically invest heavily in growth assets, predominantly in passive vehicles.
Here are practical considerations for assessing your exposure to passive flows:
- Recognise that broad market ETFs may be more focused on particular sectors like banking and mining.
- Be aware that liquidity could hide underlying fragility due to potential volatility during rebalances.
- Understand that ASX-listed stocks, particularly in sectors like resources and banking, may react more to global passive investment decisions than to fundamental values.
Conclusion
While passive investing has streamlined costs and enhanced accessibility to markets, it’s crucial to acknowledge that it can lead to scenarios where share prices deviate from their intrinsic values, especially during global downturns. Thus, investors should familiarise themselves with how passive flows influence their portfolios and take steps to manage associated risks.
