(Bloomberg) -- Exchange-traded funds are “weapons of massdestruction” that have distorted stock prices and created thepotential for a market selloff, according to the managers of theFPA Capital Fund.

Related: Investors struggle to choose the rightETF

“When the world decides that there is no need for fundamentalresearch and investors can just blindly purchase index funds andETFs without any regard to valuation, we say the time to be fearfulis now,” Arik Ahitov and Dennis Bryan, who run the $789 millionfund, said in an April 6 letter to investors.

The flood of money into passive products is making stock prices move inlockstep and creating markets increasingly divorced from underlyingfundamentals, the managers said.

As the market moves ever higher, there’s the potential for asharp decline. The U.S. ETF market has about $2.7 trillion in assets,the majority in products that track indexes. ETFs have attractedmore than $160 billion in new flows so far this year, Bloombergdata show.

“This new market structure hasn’t been tested,” Bryansaid in a telephone interview, noting that the stock markethas never gone through a major downturn when passive investors wereas important as they are now. “We could get an onslaught ofselling.”

For more than two decades under former manager Robert Rodriguez,Los Angeles-based FPA Capital was among the top-performing stockfunds in the U.S. From 1986 to 2010, it returned 14.5 percenta year compared to 8.5 percent for the Russell 2000 Index,according to a data compiled by Bloomberg.

Fund struggles

The fund has struggled in recent years, in part, because themanagers, finding too few attractive stocks to buy, have parked 35percent of their money in cash.

FPA Capital trailed 99 percent of peers over the past fiveyears, according to data compiled by Bloomberg. The fund is aconcentrated stock fund. Its biggest equity holding as of March 31was Western Digital Corp., which makes computer-storagedevices.

While several high-profile money managers have raised concernsabout ETFs, equity ETFs account for about 7 percent of the U.S.stock market’s value, according to data compiled by Bloomberg.

In a February letter to investors, Seth Klarman, who runs the$30 billion Baupost Group, said that as more investors opt forpassive investing over active management “the more inefficient themarket is likely to become.”

In the same letter, Klarman cited Nikolaos Panigirtzoglou, aglobal market strategist at JPMorgan Chase in London, who,according to Klarman, has warned that the inflows into ETFS will“make markets more brittle” and “susceptible to more severecrashes.”

Others say no relationship between indexing, marketdynamics

But Jim Rowley, senior investment strategist at Vanguard Group,disagrees with the naysayers. Vanguard, which has roughly $3trillion in assets in passive products, including almost $700billion in ETFs, has examined more than 20 years of market history,he said.

The conclusion: markets are as volatile as ever and thedispersion in the performance of individual stocks is as great asit was before indexing became popular.

“We didn’t find any relationship between indexing and marketdynamics,” he said.

Ahitov isn’t totally pessimistic. Should stocks sell offindiscriminately, there will be bargains for smart value investors.“Dennis and I will buy the good stocks that are cheap,” hesaid.

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