Index Funds: Promise or Peril?

This is Part I in a two-part series in which I address the argument that: 1) index funds are seizing an outsized influence over publicly traded corporations, and 2) that they are wielding this influence so as to reduce intra-industry competition between firms in their portfolio. In this post, I summarize the argument and offer some criticisms as to why this influence may not be as significant as it appears. In Part II, I will proceed to argue that, to the extent that index funds have indeed acquired some  influence over the firms in their portfolio, this may in fact be a salutary development.I. “Common Ownership” and Anti-CompetitivenessOver the past two decades, “passive” funds which maximally diversify their portfolios by investing in an entire market index (e.g. the S&P 500) have acquired an increasing percentage of the total shares traded on these indexes. Such funds are passive insofar as they merely track the market as a whole, vs. actively managed funds which conduct market research so as to invest in undervalued firms and to short overvalued ones, thereby earning “alpha” (above-market returns). Yet the fact that just three index funds: Vanguard, BlackRock and State Street (the “Big Three”) represent a dominant share of the index fund industry, which is itself a rapidly growing portion of the overall stock market, has raised concerns over the influenc e which this concentration confers to these funds’ managers.Three recent academic articles in the la...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs