Personally, I dont think price discovery is the biggest problem, but no overseight of the board of directors. Etf do not actively vote (as far as i understand). So this opens up for management and minority owners to run the comopany badly (or even plunder it). This is a negative effect in the long run though.
BlackRock absolutely votes. The concern is arguably the _opposite_: in the index model ownership is concentrated in a few large institutions with very broad diversification, which creates some odd incentives.
Matt Levine has a bunch of articles touching on this topic.
But ultimately the indices are incentivized by the underlying companies' growth, as to make their customers happy, thus it is in their best interest to take sane votes?
