Why? Because any one trader can swing the bid-ask spread dramatically. Worse, most traders can end up on the same side (i.e., all are sellers or all are buyers). The dearth of a contra party means the price will either skyrocket (if there are dramatically fewer sellers than buyers) or plummet (if there are dramatically fewer buyers than sellers). Given the scarcity of traders in general, these extremes can yoyo in very short periods of time.

Sound familiar? The lack of a contra party has been blamed as the reason for the near total collapse of our banking system in 2008. It's also been cited as one possible reason for last year's flash crash (we certainly do know that something similar happened in the 1987 crash that pretty much sealed the folly of "portfolio insurance" programs).

What do Thidwick and illiquid stocks have to do with ETFs? Most ETFs are index-based (or passive) investments. In a sense, index investors represent the free-riding animals to the market's moose. They'll go where ever the market takes them, which history suggests is exactly where they want to go. But, by passively riding along, these investors remove themselves from actively participating in the market. At some tipping point, as more investors shift from active to passive, more and more individual securities within any particular market will begin to experience the same illiquidity problems micro-cap stocks experience today.

Soon, like a deadly virus, illiquidity will spread to even the largest stocks, creating markets with exaggerated volatility. Theoretically, just like the animals weighing on Thidwick the endangered moose's life, the lack of active investors will threaten the very existence of our capital markets. And that will destroy our economy.

So, at what point does the market leave its free-riding index investors high and dry by shedding its antlers? I honestly don't believe the government is brave enough to outlaw index investing, the most obvious solution to prevent this problem. Too many well-endowed organizations have too many vested interests and that means campaign dollars. Similarly, even Machiavellian consumer advocacy groups see index funds as a means which (at least up until now) justify the ends. Investors themselves enjoy the ride (well, maybe except for the "Lost Decade," but the industry has quickly covered up that fact thanks to the public's short attention span).

Fortunately, like the natural biology of moose, the market has a natural built-in mechanism for dumping these free-riders. I've run out of space here, but if you'd like to know what it is (and how you can take advantage of it), read this humorous piece, "3 Reasons to Outlaw Index Investing Right Now (and One Selfish Reason Not To) in 5 Acts." Be forewarned, before reading you might want to first brush up on your Marx – Groucho, that is.