Critics of index funds are pursuing a new line of attack. Passive investing, they argue, is distorting market prices and creating an unhealthy bubble.

To be sure, the market today is expensive. The price-to-earnings (P/E) ratio of the S&P 500 stands at about 22. That’s substantially above its long-term average of about 16. Of more concern, that metric is approaching a level not seen since the market peak in 2000, just before stocks dropped 57%.

The concern today is that the market is similarly skating on thin ice, and some feel that index funds are the proximate cause. Here’s how a recent writeup in The Atlantic presented the argument: “A market dominated by passive investors naturally becomes more concentrated…Because they allocate funds based on the existing size of companies, they end up buying a disproportionate share of the biggest stocks, causing the value of those stocks to rise even more…”

To support this argument, critics note that the so-called Magnificent Seven technology stocks are now valued at more than $1 trillion each. Nvidia alone is worth more than $4 trillion. To put that in perspective, Nvidia is worth more than the smallest 235 companies in the S&P 500 combined.

In an effort to pin the blame on index funds, The Atlantic explains how actively-managed—that is, non-index—funds operate. Traditional funds are “highly sensitive to company fundamentals and broader economic conditions.” The managers of these funds “pore over earnings reports, scrutinize company finances, and analyze market trends…”

In other words, according to this argument, traditional active managers do more to keep markets healthy. Index funds, on the other hand, are presented as an unhealthy influence because they buy stocks robotically and sell them only infrequently. And since index funds have been steadily gaining market share, the implication is that they are responsible for driving prices to irrationally high levels.

Should we be concerned? In my view, there’s a kernel of truth to some of these arguments, but I’m not sure they’re entirely accurate.

Let’s start with The Atlantic’s first point: It argues that index funds are creating unhealthy market concentration because they allocate funds “disproportionately” to the largest stocks. The logical flaw here is that index funds actually do the opposite: They allocate money proportionately. If Amazon, for example, represents 4% of the S&P 500, then $4 out of every $100 invested in an S&P 500 index fund will be allocated to Amazon. Index funds, in other words, are an entirely neutral factor in the market.

Index fund critics also fret about the fact that there are fewer public companies today than there were 25 years ago. The implication, according to this argument, is that more dollars are chasing fewer stocks, thus further driving prices up. That sounds like a valid argument, but it ignores an important reality: Companies today are so much larger and more profitable than in the past that the aggregate value of public companies is, as a result, much larger. Apple and Nvidia, for example, each earn about $100 billion per year. So the fact that there is a smaller number of public companies today is more of a side point and not really relevant.

Critics of index funds also confuse correlation and causation. The reality is that this isn’t the first time that market valuations have risen. At many points in the past, stocks have been even more expensive than they are today. During the 1990s, for example, when valuations rose dramatically, index funds represented less than 10% of mutual fund dollars. Looking back further, index funds didn’t even exist before the 1970s, and yet market bubbles have occurred throughout history. The market might be high today, but it’s ahistorical to say that index funds are the cause.

For these reasons, I don’t think we can blame index funds for today’s share prices, and I still think they’re the best way to invest. That said, investors should always keep an eye on risk. As the end of the year approaches, it’s a good time to conduct a portfolio audit. Here are some steps I recommend:

First, review your asset allocation. As I’ve noted in the past, I suggest asking three questions: How much risk do I need to take? How much risk can I afford to take? And how much risk am I comfortable taking? An alternative you might consider is the popular “bucket system.” Either way, you want to set aside sufficient dollars outside the stock market to carry you through a market downturn, if that’s the way things go.

Then, look to diversify within the stock portion of your portfolio. Owning just the S&P 500 has been a winning formula for many years, but in light of today’s market concentration and valuation, it makes sense to diversify into smaller stocks, into value stocks and into international stocks.

Another strategy would be to own a fund tracking the S&P 500 Equal Weight Index. As its name suggests, this version of the S&P 500 holds each of the 500 stocks in equal amounts—about 0.2% each. Result: The Magnificent Seven as a group would hold just a 1.4% weighting—far less than their 35% weight in the standard index. This isn’t my preferred approach because it can be tax-inefficient, and equal-weight funds are a bit expensive. But it’s worth considering.

A final point: While I suggest taking precautions with your portfolio, I don’t mean to unnecessarily sound the alarm. Even though stocks are expensive today, that doesn’t necessarily mean that they have to drop. We should always be prepared in case they do. But the market could also return to Earth in a much more gradual fashion. If corporate earnings were to grow over the next five or so years at their historical average rate of about 7%, then the market’s P/E ratio would naturally drop back to a normal level without any sort of dramatic or unpleasant market downturn. Investors, in other words, should take precautions but shouldn’t panic.​