Abnormal returns for stocks added to or removed from the S&P 500 index (known as index effect) have been declining, despite a sharp rise in demand shifts of passive funds. I explore (i) whether these abnormal returns during index reconstitutions stem from passive demand shifts or information content, and (ii) why they have decreased over time. My study isolates pure demand-based price impact using a novel identification strategy that analyzes incumbent stocks–index constituents whose portfolio weights adjust due to the differing sizes of added and deleted firms. I find that (i) the index effect was primarily driven by information prior to 2000 while passive demand became predominant thereafter, and (ii) the declining index effect is a direct result of the flattening of stocks’ demand curves in the context of index reconstitutions, independent of the informativeness of the index committees decisions. This flattening is associated with decreased arbitrage risk and enhanced cross-stock substitution.