Advertisement

Column: Investing through index funds is more popular than ever, so why is it becoming controversial?

Traders work on the floor of the New York Stock Exchange.
Index fund investing has had a huge effect on the stock market.
(Seth Wenig / Associated Press)

The share of adult Americans who own stocks is approaching an all-time high of 63%, which may explain why events such as the surge in “meme” stocks like GameStop gets such generous play in the news.

But it doesn’t explain why the investment vehicles that dominate Americans’ portfolios — passive mutual funds tied to market indexes such as the Standard & Poor’s 500 — have traditionally drawn so much less interest in the news media.

That may be changing, thanks to concerns about index funds expressed across the partisan spectrum. To put these concerns simply, Democrats and progressives are uneasy about the concentration of investment power in the hands of a few fund management firms that vacuum the vast bulk of investment dollars into their index funds, notably BlackRock, Vanguard and State Street.

Advertisement

Control of most public companies...will soon be concentrated in the hands of a dozen or fewer people.

— John C. Coates, Harvard Law School (2018)

Republicans and conservatives also fret about the concentration of power, but their concern is more specific — they complain that the passive fund managers deploying $15 trillion in assets globally are surreptitiously pushing a liberal agenda on corporate managements, especially in “ESG” categories, the environment, social issues and corporate governance.

That was the claim of 21 red-state attorneys general, who groused last year in letters to the big asset management firms that they appeared to be pressing managers of their portfolio companies to act against global warming (as though that’s a bad thing).

Advertisement

More on that in a bit. First, a primer on passive investing and why it attracts so much money.

As so many investors have learned from bitter experience, trying to pick individual winners in the stock market is a mug’s game.

Advertisement

Doing the financial analysis necessary to judge the potential gains of individual stocks is a full-time job, and most people already have full-time jobs. Few have the financial resources to brave the periodic downdrafts in the stock market without quailing. (As J.P. Morgan supposedly advised a friend who said he was so worried about his portfolio that he couldn’t sleep at night, “Then sell down to your sleeping point.”)

Enter the index mutual fund. Jack Bogle of Vanguard launched the first such fund to be widely marketed to retail investors in 1975. It was designed to match the performance of the S&P 500 simply by replicating its holdings and their weighting in the index. It was, in short, a way for the average investor to ride the ups and downs of the stock market effortlessly.

CalPERS, the nation’s biggest public pension fund, makes good on its support of shareholder rights by voting against all 12 Exxon directors.

Index funds have several virtues. Because the makeup of the 500 index changes only rarely, the 500 fund and funds like it make few purchases or sales. That reduces transaction costs, which allowed Bogle to keep fees low. They’re also tax-friendly — because they don’t have to sell stocks very often, they incur minimal capital gains taxes, which would be passed through to its investors.

The Vanguard 500 fund, along with other index funds, exposed the dirty little secret of the brokerage industry: “Active” fund managers, who bought and sold vigorously to dump losing stocks and ride winners, seldom did better than the broad market.

Over the last year, only about 40% of actively managed large-company funds did better than the S&P 500 index, according to S&P’s SPIVA scorecard (for “S&P Indices Versus Active”). Over the last 10 years, only about 12.6% of large-cap funds beat the S&P 500.

It’s true that a stock-picker here or there will have a successful run, but rarely for more than a few years. The most famous, Peter Lynch of Fidelity Investments, had a gilt-edged run from 1977 to 1990, during which he built Fidelity’s Magellan Fund from $18 million in assets to $14 billion. In that time span Magellan averaged an annual return of 29%, possibly the most successful such run ever.

Advertisement

But Lynch had some advantages that are rarely noted: For the first four years of his management, Magellan was a private investment fund for Fidelity’s founding Johnson family; it wasn’t opened to outsiders until 1981. For years after that it was relatively small, which is almost always an advantage for fund managers.

By the end of Lynch’s tenure Magellan was a behemoth struggling to eke out “a razor thin margin of victory,” as an investment expert put it. Magellan actually fell behind the S&P 500 in two of Lynch’s final four years of management.

Exxon Mobil objects to the Securities and Exchange Commission’s rule on shareholder proposals. So why is it suing these small investors instead of the SEC?

That’s not unusual. Fewer than 5% of all actively managed funds remain in the top half of funds by performance for even five years.

So it’s not surprising that passively managed index funds have outrun active funds for years. Finally, as of the end of December according to Morningstar, assets in passive investments including mutual funds and exchange-trade funds exceeded those in active investments, $13.29 trillion versus $13.23 trillion. That gap is destined to widen.

But that success has generated a backlash. The issue boils down to whether there can be too much passive investing and if so, how much is too much.

What unnerves some market experts is that passive investors by their nature don’t care what they’re buying — in fact, they usually don’t even know. (How many owners of Vanguard’s S&P 500 index fund can name even 10 stocks in the index?) That relieves them of the chore, even the duty, of making judgments about a company’s future, its competitive behavior, its prospects.

A 2014 academic paper suggested that, because index fund investors are likely to own all the major competitors in a given industry (because all are in the S&P 500), aggressive competing by one will reduce the value of the others, possibly lowering the value of the index.

Advertisement

So pressure on corporate managers to increase market share evaporates, and the industry begins to resemble a monopoly, which produces a “loss for the economy and adverse consequences for consumers.”

A related drawback comes from the dominance of the passive asset business by a small number of huge brokerage firms. This is what legal expert John C. Coates of Harvard Law School called “the problem of twelve” — that “control of most public companies ... will soon be concentrated in the hands of a dozen or fewer people,” namely, the top managers of the biggest passive investment firms.

They, not individual investors, will decide what corporate policies should be, and they’ll have access to trillions of dollars in assets belonging to billions of uncaring investors to make their own views heard.

The National Labor Relations Board based its joint-employer rule on the reality of today’s workforces. So of course a Trump-appointed judge overturned it.

That’s the prospect that had the red-state attorneys general vibrating.

“You are not the same as political or social activists,” they wrote, “and you should not be allowing the vast savings entrusted to you to be commandeered by activists to advance non-financial goals.” Among those goals, they wrote, is changing corporate behavior “so that it aligns with the Environmental, Social, and Governance (ESG) goal of achieving net zero by 2050.” (That is, achieving neutral impact on global warming by that year.)

There are a couple of problems with the red-staters’ argument. For one thing, there’s no evidence that ESG policies are necessarily at odds with the goals of the average investor, who may indeed favor increasing diversity and fighting the threat of global warming. Some investors may indeed see the improvement of social and environmental conditions as a responsibility of corporate managements.

Another problem is that defining racism and global warning as “non-financial” problems is a crabbed, highly partisan and erroneous viewpoint. A company that allows racial discrimination to reign on its factory floors is asking for regulatory problems and for a loss of customers. There are precious few businesses that will be immune from the costs of global warming, which could force them to close or relocate plants or deplete their profits.

Advertisement

The authors of that threatening letter are performing for what may be a very narrow and shrinking voting base. They’re the ones who may be pushing “non-financial” policies on corporations; they’re just too blind to see the possible costs of the status quo. They’re backed by right-wing organizations.

That said, the concentration of financial power in passive investment funds has raised concerns in Washington, and not only among conservatives. In April, the board of the Federal Deposit Insurance Corp., a major federal bank regulator, began pondering whether the biggest index fund firms may own enough shares in banks to exercise unwelcome policy control.

Vanguard has a long history of denying its customers access to investments it believes are dumb. Now it has added crypto to the list.

Members of the FDIC board — Republican Jonathan McKernan and Democrat Rohit Chopra — met jointly with executives from BlackRock and Vanguard to get a better sense of their bank holdings, the Wall Street Journal reported.

Nothing has come of those meetings as yet, but the big passive investment firms have taken steps to give their investment customers more say in how their shares are voted on shareholder proposals at corporate annual meetings.

Up to now, the firms have done the voting of what may be sizable holdings in stocks in individual companies, often following the lead of proxy advisory services such as Glass, Lewis & Co. or Institutional Shareholder Services. Starting in 2022, BlackRock afforded clients in some of its funds to make their own voting decisions.

The firm says that by the end of last year, investors in funds valued at $2.6 trillion of its $5.2 trillion in equity index funds were eligible to participate in what it calls Voting Choice; clients with $598 billion in holdings in those funds participated.

Advertisement

Vanguard introduced a pilot program along the same lines last year and expanded it this year. Investors in five of its equity index funds can choose from among four approaches: casting votes consistent with a portfolio company management’s recommendations; voting along with the ESG recommendations of Glass Lewis; leaving their vote up to Vanguard; or not casting a vote at all.

Whether that will quell the backlash against concentrated passive investing isn’t clear just yet. It may energize more investors to pay attention to the companies in their index funds. Or, given that retail investors are known not to bother voting on shareholder resolutions, it could even strengthen the hand of the big firms in seeking to guide policy of indexed corporations.

The only thing that everyone seems to agree on is that passive investing does better than active management — at the moment. Whether or when that tide will turn ... who knows?

Advertisement
universo-virtual.com
buytrendz.net
thisforall.net
benchpressgains.com
qthzb.com
mindhunter9.com
dwjqp1.com
secure-signup.net
ahaayy.com
soxtry.com
tressesindia.com
puresybian.com
krpano-chs.com
cre8workshop.com
hdkino.org
peixun021.com
qz786.com
utahperformingartscenter.org
maw-pr.com
zaaksen.com
ypxsptbfd7.com
worldqrmconference.com
shangyuwh.com
eejssdfsdfdfjsd.com
playminecraftfreeonline.com
trekvietnamtour.com
your-business-articles.com
essaywritingservice10.com
hindusamaaj.com
joggingvideo.com
wandercoups.com
onlinenewsofindia.com
worldgraphic-team.com
bnsrz.com
wormblaster.net
tongchengchuyange0004.com
internetknowing.com
breachurch.com
peachesnginburlesque.com
dataarchitectoo.com
clientfunnelformula.com
30pps.com
cherylroll.com
ks2252.com
webmanicura.com
osostore.com
softsmob.com
sofietsshotel.com
facetorch.com
nylawyerreview.com
apapromotions.com
shareparelli.com
goeaglepointe.com
thegreenmanpubphuket.com
karotorossian.com
publicsensor.com
taiwandefence.com
epcsur.com
odskc.com
inzziln.info
leaiiln.info
cq-oa.com
dqtianshun.com
southstills.com
tvtv98.com
thewellington-hotel.com
bccaipiao.com
colectoresindustrialesgs.com
shenanddcg.com
capriartfilmfestival.com
replicabreitlingsale.com
thaiamarinnewtoncorner.com
gkmcww.com
mbnkbj.com
andrewbrennandesign.com
cod54.com
luobinzhang.com
bartoysdirect.com
taquerialoscompadresdc.com
aaoodln.info
amcckln.info
drvrnln.info
dwabmln.info
fcsjoln.info
hlonxln.info
kcmeiln.info
kplrrln.info
fatcatoons.com
91guoys.com
signupforfreehosting.com
faithfirst.net
zjyc28.com
tongchengjinyeyouyue0004.com
nhuan6.com
oldgardensflowers.com
lightupthefloor.com
bahamamamas-stjohns.com
ly2818.com
905onthebay.com
fonemenu.com
notanothermovie.com
ukrainehighclassescort.com
meincmagazine.com
av-5858.com
yallerdawg.com
donkeythemovie.com
corporatehospitalitygroup.com
boboyy88.com
miteinander-lernen.com
dannayconsulting.com
officialtomsshoesoutletstore.com
forsale-amoxil-amoxicillin.net
generictadalafil-canada.net
guitarlessonseastlondon.com
lesliesrestaurants.com
mattyno9.com
nri-homeloans.com
rtgvisas-qatar.com
salbutamolventolinonline.net
sportsinjuries.info
topsedu.xyz
xmxm7.com
x332.xyz
sportstrainingblog.com
autopartspares.com
readguy.net
soniasegreto.com
bobbygdavis.com
wedsna.com
rgkntk.com
bkkmarketplace.com
zxqcwx.com
breakupprogram.com
boxcardc.com
unblockyoutubeindonesia.com
fabulousbookmark.com
beat-the.com
guatemala-sailfishing-vacations-charters.com
magie-marketing.com
kingstonliteracy.com
guitaraffinity.com
eurelookinggoodapparel.com
howtolosecheekfat.net
marioncma.org
oliviadavismusic.com
shantelcampbellrealestate.com
shopleborn13.com
topindiafree.com
v-visitors.net
qazwsxedcokmijn.com
parabis.net
terriesandelin.com
luxuryhomme.com
studyexpanse.com
ronoom.com
djjky.com
053hh.com
originbluei.com
baucishotel.com
33kkn.com
intrinsiqresearch.com
mariaescort-kiev.com
mymaguk.com
sponsored4u.com
crimsonclass.com
bataillenavale.com
searchtile.com
ze-stribrnych-struh.com
zenithalhype.com
modalpkv.com
bouisset-lafforgue.com
useupload.com
37r.net
autoankauf-muenster.com
bantinbongda.net
bilgius.com
brabustermagazine.com
indigrow.org
miicrosofts.net
mysmiletravel.com
selinasims.com
spellcubesapp.com
usa-faction.com
snn01.com
hope-kelley.com
bancodeprofissionais.com
zjccp99.com
liturgycreator.com
weedsmj.com
majorelenco.com
colcollect.com
androidnews-jp.com
hypoallergenicdogsnames.com
dailyupdatez.com
foodphotographyreviews.com
cricutcom-setup.com
chprowebdesign.com
katyrealty-kanepa.com
tasramar.com
bilgipinari.org
four-am.com
indiarepublicday.com
inquick-enbooks.com
iracmpi.com
kakaschoenen.com
lsm99flash.com
nana1255.com
ngen-niagara.com
technwzs.com
virtualonlinecasino1345.com
wallpapertop.net
nova-click.com
abeautifulcrazylife.com
diggmobile.com
denochemexicana.com
eventhalfkg.com
medcon-taiwan.com
life-himawari.com
myriamshomes.com
nightmarevue.com
allstarsru.com
bestofthebuckeyestate.com
bestofthefirststate.com
bestwireless7.com
declarationintermittent.com
findhereall.com
jingyou888.com
lsm99deal.com
lsm99galaxy.com
moozatech.com
nuagh.com
patliyo.com
philomenamagikz.net
rckouba.net
saturnunipessoallda.com
tallahasseefrolics.com
thematurehardcore.net
totalenvironment-inthatquietearth.com
velislavakaymakanova.com
vermontenergetic.com
sizam-design.com
kakakpintar.com
begorgeouslady.com
1800birks4u.com
2wheelstogo.com
6strip4you.com
bigdata-world.net
emailandco.net
gacapal.com
jharpost.com
krishnaastro.com
lsm99credit.com
mascalzonicampani.com
sitemapxml.org
thecityslums.net
topagh.com
flairnetwebdesign.com
bangkaeair.com
beneventocoupon.com
noternet.org
oqtive.com
smilebrightrx.com
decollage-etiquette.com
1millionbestdownloads.com
7658.info
bidbass.com
devlopworldtech.com
digitalmarketingrajkot.com
fluginfo.net
naqlafshk.com
passion-decouverte.com
playsirius.com
spacceleratorintl.com
stikyballs.com
top10way.com
yokidsyogurt.com
zszyhl.com
16firthcrescent.com
abogadolaboralistamd.com
apk2wap.com
aromacremeria.com
banparacard.com
bosmanraws.com
businessproviderblog.com
caltonosa.com
calvaryrevivalchurch.org
chastenedsoulwithabrokenheart.com
cheminotsgardcevennes.com
cooksspot.com
cqxzpt.com
deesywig.com
deltacartoonmaps.com
despixelsetdeshommes.com
duocoracaobrasileiro.com
fareshopbd.com
goodpainspills.com
kobisitecdn.com
makaigoods.com
mgs1454.com
piccadillyresidences.com
radiolaondafresca.com
rubendorf.com
searchengineimprov.com
sellmyhrvahome.com
shugahouseessentials.com
sonihullquad.com
subtractkilos.com
valeriekelmansky.com
vipasdigitalmarketing.com
voolivrerj.com
zeelonggroup.com
1015southrockhill.com
10x10b.com
111-online-casinos.com
191cb.com
3665arpentunitd.com
aitesonics.com
bag-shokunin.com
brightotech.com
communication-digitale-services.com
covoakland.org
dariaprimapack.com
freefortniteaccountss.com
gatebizglobal.com
global1entertainmentnews.com
greatytene.com
hiroshiwakita.com
iktodaypk.com
jahatsakong.com
meadowbrookgolfgroup.com
newsbharati.net
platinumstudiosdesign.com
slotxogamesplay.com
strikestaruk.com
trucosdefortnite.com
ufabetrune.com
weddedtowhitmore.com
12940brycecanyonunitb.com
1311dietrichoaks.com
2monarchtraceunit303.com
601legendhill.com
850elaine.com
adieusolasomade.com
andora-ke.com
bestslotxogames.com
cannagomcallen.com
endlesslyhot.com
iestpjva.com
ouqprint.com
pwmaplefest.com
qtylmr.com
rb88betting.com
buscadogues.com
1007macfm.com
born-wild.com
growthinvests.com
promocode-casino.com
proyectogalgoargentina.com
wbthompson-art.com
whitemountainwheels.com
7thavehvl.com
developmethis.com
funkydogbowties.com
travelodgegrandjunction.com
gao-town.com
globalmarketsuite.com
blogshippo.com
hdbka.com
proboards67.com
outletonline-michaelkors.com
kalkis-research.com
thuthuatit.net
buckcash.com
hollistercanada.com
docterror.com
asadart.com
vmayke.org
erwincomputers.com
dirimart.org
okkii.com
loteriasdecehegin.com
mountanalog.com
healingtaobritain.com
ttxmonitor.com
bamthemes.com
nwordpress.com
11bolabonanza.com
avgo.top