I don't buy the liquidity argument. Their mere existence creates liquidity. Two sides to every trade. Index fund "sell offs" will likely go to buyers of the same index fund shares but at a lower price.

Apple alone has $50 billion in cash that will flow into Vanguard if index funds hit a 50% plunge. Same with Buffet. Index funds may be bubble priced, but they don't suffer from a liquidity issue.