Bogle Sounds A Alarm On Index Funds

From the Wall Street Journal, Nov. 29:

The manlike soul nurture of the index fund says it’s likely exclusively a affair of fourth dimension before they ain one-half of all United States of America stocks; ‘I do non believe that such concentration would serve the national interest’

By  John C. Bogle

There no longer tin move whatever dubiety that the creation of the start index usual fund was the most successful innovation—especially for investors—in modern fiscal history. The interrogation nosotros require to inquire ourselves right away is: What happens if it becomes likewise successful for its ain good?

The First Index Investment Trust, which tracks the returns of the S&P 500 in addition to is right away known every bit the Vanguard 500 Index Fund, was founded on Dec 31, 1975. It was the start “product,” every bit it were, of a novel usual fund manager, The Vanguard Group, the fellowship I had founded exclusively 1 twelvemonth earlier.

The fund’s August 1976 initial populace offering may bring been the worst underwriting inward Wall Street history. Despite the leadership of the Street’s 4 largest retail brokers, the IPO roughshod far curt of its master copy $250 meg target. The initial assets of 500 Index Fund totaled but $11.3 million—falling a mere 95% curt of its goal.

The fund’s scrap for the attending (and dollars) of investors was epic. Known every bit “Bogle’s folly,” the fund’s novel strategy of exactly tracking a wide marketplace position index was almost totally rejected past times Wall Street. The caput of Fidelity, in addition to thence past times far the fund industry’s largest firm, lay the osculate of conk on his tiny rival: “I can’t believe that the groovy bulk of investors are [sic] going to move satisfied alongside exactly receiving average returns. The elevate of the game is to move the best.”

Almost a decade passed before a bit S&P 500 index fund was formed, past times Wells Fargo inward 1984. During that period, Vanguard’s index fund attracted cash inflow averaging exclusively $16 meg per year.

Now let’s advance the clock to 2018. What a departure 42 years makes! Equity index fund assets right away full or thence $4.6 trillion, spell full index fund assets bring surpassed $6 trillion. Of this total, most 70% is invested inward wide marketplace position index funds modeled on the master copy Vanguard fund.

Yes, United States of America index usual funds bring grown to huge size, alongside their holdings doubling from 4.5% of full United States of America stock-market value inward 2002 to 9% inward 2009, in addition to and thence almost doubling in 1 lawsuit to a greater extent than to to a greater extent than than 17% inward 2018. Even that penetration understates the purpose of usual fund managers, every bit they also offering actively managed funds, in addition to their combined assets sum to to a greater extent than than 35% of the shares of United States of America corporations.

If historical trends continue, a handful of giant institutional investors volition 1 24-hour interval agree voting command of virtually every large United States of America corporation. Public policy cannot ignore this growing dominance, in addition to consider its comport on on the fiscal markets, corporate governance, in addition to regulation. These volition move major issues inward the coming era.

Three index fund managers dominate the plain alongside a collective 81% part of index fund assets: Vanguard has a 51% share; BlackRock, 21%; in addition to State Street Global, 9%. Such domination exists primarily because the indexing plain attracts few novel major entrants....

... My concerns are shared past times many academic observers. In a draft newspaper released inward September, Prof. John C. Coates of Harvard Law School wrote that indexing is reshaping corporate governance, in addition to warned that nosotros are tipping toward a betoken where the voting ability volition move “controlled past times a modest number of individuals” who tin practise “practical ability over the bulk of United States of America populace companies.” Professor Coates does non similar what he sees, in addition to offers tentative policy options—some necessary, oft painful to contemplate. His conclusion—“The upshot is non probable to run away”—is unarguable....

...MUCH MORE, including proposed solutions.