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Tue Apr 6, 2021, 08:19 PM

Could Index Funds Be 'Worse Than Marxism'?

Economists and policy makers are worried that the Vanguard model of passive investment is hurting markets.

https://www.theatlantic.com/ideas/archive/2021/04/the-autopilot-economy/618497/



The stock market has had quite a year. Plenty of cash is sloshing around, the pandemic recession notwithstanding, thanks to loose monetary policy, rampant inequality, crypto-speculation, and helicopter drops of cash. Plenty of bored people are reading market rumours on the internet, pumping and dumping penny stocks, riding GameStop to the moon, and bidding up the price of esoteric currencies and digital artworks. The markets are swooning and hitting new highs as kitchen-table investing—laptop-on-the-couch investing, really—is having a heyday not seen since the late 1990s. Yet economists, policy makers, and investors are worried that American markets have become inert—the product of a decades-long trend, not a months-long one. For millions of Americans, getting into the market no longer means picking stocks or hiring a portfolio manager to pick them for you. It means pushing money into an index fund, as offered by financial giants such as Vanguard, BlackRock, and State Street, otherwise known as the Big Three.

With index funds, nobody’s behind the scenes, dumping bad investments and selecting good ones. Nobody’s making a bet on shorting Tesla or going long on Apple. Nobody’s hedging Europe and ploughing money into Vietnam. Nobody is doing much of anything at all. These funds are “passively managed,” in investor-speak. They generally buy and sell stocks when those stocks enter or exit indices, such as the S&P 500, and size their holdings according to metrics such as market value. Index funds mirror the market, in other words, rather than trying to pick winners and losers within it. Thanks to their ultralow fees and stellar long-term performance, these investment vehicles have soaked up more and more money since being developed by Vanguard’s Jack Bogle in the 1970s. At first, Wall Street was sceptical that investors would accept making what the market made rather than betting on a market-beating return. But as of 2016, investors worldwide were pulling more than $300 billion a year out of actively managed funds and pushing more than $500 billion a year into index funds. Some $11 trillion is now invested in index funds, up from $2 trillion a decade ago. And as of 2019, more money is invested in passive funds than in active funds in the United States.

Indexing has gone big, very big. For nine in 10 companies on the S&P 500, their largest single shareholder is one of the Big Three. For many, the big indexers control 20 percent or more of their shares. Index funds now control 20 to 30 percent of the American equities market, if not more. Indexing has also gone small, very small. Although many financial institutions offer index funds to their clients, the Big Three control 80 or 90 percent of the market. The Harvard Law professor John Coates has argued that in the near future, just 12 management professionals—meaning a dozen people, not a dozen management committees or firms, mind you—will likely have “practical power over the majority of U.S. public companies.” This financial revolution has been unquestionably good for the people lucky enough to have money to invest: They’ve gotten better returns for lower fees, as index funds shunt billions of dollars away from financial middlemen and toward regular families. Yet it has also moved the country toward a peculiar kind of financial oligarchy, one that might not be good for the economy as a whole.

The problem in American finance right now is not that the public markets are overrun with failsons picking up stock tips on Reddit, investors gambling on art tokens, and rich people flooding cash into Special Purpose Acquisition Companies, or SPACs. The problem is that the public markets have been cornered by a group of investment managers small enough to fit at a lunch counter, dedicated to quiescence and inertia. Before index funds, if you wanted to get into the stock market, you had a few choices. You could pick stocks yourself, using a broker to buy and sell them. (Nowadays, you can easily buy and sell on your own.) Or you could buy into a mutual fund—a collection of investments selected by a vetted manager, promising solid returns in exchange for an annual fee. Then Bogle, the head of a mutual-fund company, turned on the industry. He argued that mutual-fund fees were exorbitant, that mutual funds generally failed to beat the market, and that fund employees had an obvious conflict of interest: Was their priority to maximize returns for the people who bought into the mutual fund, or to make money for the company? He set up a company called Vanguard offering a new kind of mutual fund, one that would buy and hold every stock or bond on a major index and that would devote itself to driving fees as low as possible. Other companies, including Fidelity, State Street, and BlackRock, soon mimicked this strategy, later adding exchange-traded options, or ETFs.

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Reply Could Index Funds Be 'Worse Than Marxism'? (Original post)
Celerity Apr 6 OP
leighbythesea2 Apr 6 #1
gratuitous Apr 6 #2
Dawson Leery Apr 6 #3
Celerity Apr 6 #4

Response to Celerity (Original post)

Tue Apr 6, 2021, 09:45 PM

1. Fascinating

Have not heard this. Bookmarking.

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Response to Celerity (Original post)

Tue Apr 6, 2021, 10:14 PM

2. Oh absolutely!

I mean, all index funds do is make money for the investors. Where are the commissions? Why isn't capital chasing the latest fad? Where's the risk? Where's the thrill? The money in an index fund just sits there, accruing value. It's unamerican to make a decent return without taking crazy stupid risks and wheeling and dealing so that brokers can score a commission on every transaction.

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Response to Celerity (Original post)

Tue Apr 6, 2021, 10:21 PM

3. What if people want safe investments?

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Response to Dawson Leery (Reply #3)

Tue Apr 6, 2021, 11:32 PM

4. There are other forms of safe investments, and the negative impact of this tremendous

concentration of controlling power my well (not a settled case by any means) any benefits in the long run. The article goes in further detain on that. Many other good articles on the subject out there as well.

The New Money Trust: How Large Money Managers Control Our Economy and What We Can Do About It

https://www.economicliberties.us/our-work/new-money-trust/#



I am not saying to not use index funds if that is what you feel comfortable with, btw.

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