All humans are inherently active investors. You make an active decision when:
- Picking an ETF based on its objectives (note - no ETF is truly passive: All remove insolvent companies.)
- Deciding to invest passively instead of actively
- Deciding to invest at all
All the people currently sitting on index ETFs aren't inherently passive, they have just decided that at this time, they are happy with the value they're getting from them. They refrain from active investing because they don't feel like the effort needed is justified by how much they would get.
So it is unrealistic to think of people suddenly becoming passive. When the volume of active trading decreases, competition also decreases, so it becomes easier to make money. This will attract more people to active investment, and existing actives will become wealthier and create more active volume.
Also, it is not true that ETFs are parasitic, because they do not take any value away from the market. They simply allocate capital indiscriminately, so that the only profit/loss is from whatever wealth is created/destroyed by the sum of our economic activity. So far, we live in prosperous times where humanity creates wealth, and indexing is profitable. If the economy ceased to productive, that would surely change. Even the people who are absolutely clueless about markets would at least sell their ETFs and do something else with the money (which would probably still benefit some company).
Therefore the real risk is not the extinction of active investors, but the destabilization of the economy. This is on several levels, such as your country's economy, your bloc's economy and the planet's economy, depending on what exactly your indexing strategy is. But the point is, when the economy stops producing more than it destroys, indexing is dead. But this has little to do with insufficient active investment.
There is another arguably less real risk, which is market panic and a crash. I call this less real because while traditionally it is a risk, it does not persist and indexes often quickly recover. This likewise does not arise from a dearth of active trading, but panic from market participants. This is another case where you can see ETFers are not passive at all: When their index goes red, they all want to sell, and many do.
So to answer your topic, there are obvious points where index funds become unprofitable:
- When the index sucks (eg. poor objective)
- When the fund management sucks (eg. high fees)
- When the economy goes in the toilet (eg. war)
- When people panic (eg. bubble burst)
But I don't think there will ever be a tipping point that causes a collapse. A tipping point would require that either active or passive investment was self promoting: The more people do it, the more people are induced to do it. But it's the opposite: The more people do it, the less attractive it becomes vs. the other choice, because competition lowers your income potential.
As for ETFs being better than active funds, I regard that as academic at best, propaganda at worst. These aren't really things that can be meaningfully compared, there are all sorts of active funds and some do much better than the index. The only thing that is safe to say is that active investment is more work.
But is there any consequence at all to capital inflow to ETFs? I think the most pertinent one is to consider that a lot of people invest in ETFs are very low information. Their investment decision rests on "it went up, therefore I buy". When it stops going up, these people are liable to panic and sell, because their whole thesis has been refuted. The most obvious consequence of this is that the magnitude of both bubbles and crashes will be amplified.
Another minor effect is that because indexes favor large companies, they promote an environment where the rich get richer, but this is effectively countered by arbitrage from even a few active investors.