With all the malfeasance in the world of finance, you wouldn't expect the humble index fund to be near the top of the Most Wanted list. This is, after all, an industry where people make millions through insider trading, and where sleazy advisers buy penny stocks for senior citizens. Yet, who is the target of the fiercest outrage in the financial industry these days? Those unspeakably malignant index funds and ETFs.
These are the same funds that allow even the smallest investors to build diversified, tax-efficient portfolios at rock-bottom cost. They've liberated investors from the corrosive costs of traditional funds and made it possible to invest on your own without having to research companies and buy individual stocks. So what's with the article in the September issue of The Atlantic called Are Index Funds Evil?, with the subtitle, "A growing chorus of experts argue that they're strangling the economy – and must be stopped"?
The article's main argument goes like this. For decades, index funds have been held up as a triumph for ordinary investors at the expense of overpaid active fund managers. But their success has led to some collateral damage: namely, consumers may be paying more for some goods and services.
That's because a small number of huge index fund and ETF providers hold massive stakes in U.S. companies. Three firms – Vanguard, BlackRock and State Street – together own about 15 per cent of the shares of major U.S. airlines. Some economists argue that this high level of common ownership creates disincentives for companies to compete with one another, resulting in, for example, higher costs for airline tickets.