Hidden Dangers of the Great Index Fund Takeover

The extremely simple and correct solution here is to not let index funds <i>themselves</i> vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don&#x27;t know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

I think at some point we&#x27;ll hit a saturation point on passively managed funds. What they&#x27;re really doing is edging out the non profitable actively managed funds, and forcing managers to prove they can beat the market if they want investment. I also think we&#x27;ll see more brokerages starting their own indices, which will lessen the power of any individual fund

Isn&#x27;t it possible for the index funds to simply <i>not</i> wield the power they have, and abstain from every vote? I was surprised that funds that are not actively managed are still actively engaging with public companies.

This is such a fascinating problem. On the one hand Jack Bogle&#x27;s invention of the index fund has been so good for retail investors but because the process currently requires a middle man - i.e. one of the big three - these index funds have slowly become bloated with power.<p>What if the algorithm Vanguard uses was open sourced and could be self-hosted by independent investors?<p>Where each investor owns their portfolio outright and adjustments to the portfolio are made automatically by a free index manager bot that runs the simple algorithm an index fund manager like Vanguard would.<p>Why wouldn&#x27;t something like that work?

While this seems (incredibly) scary it makes me think that this could be a huge opportunity for entrepreneurs (and some are currently undertaking it).<p>The fintech entrepreneur can carefully paint the picture of the dangers of the big 3 while advocating for smaller index funds for a smaller set of investors.<p>This smaller set of investors can have stocks based on their individual goals and interests. You just duplicate this over a lot more funds. The returns won’t be as high initially but if the entrepreneur can convince customers that this must be done it should help spurn new markets towards sustainability or carbon reduction etc.<p>Edit: plz tell me if I totally misunderstood the article.

&gt; Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding.<p>&gt; She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An investor who holds both, on the other hand, would prefer that Coke and Pepsi avoid price wars.<p>So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution.

Are we really supposed to get excited about <i>Bloomberg</i> whining about the evils of index funds?

How about the danger of three corporations being responsible for <i>liquidity</i> in 30% of these shares.<p>What happens if one of these companies goes down, and with it, a need to liquidate 8% of Apple in a single day?

Giant organization overseeing a huge number of competing interests and accountable by proxy to millions of individual shareholders.<p>This sounds like a government. Maybe we’ll see voting for representatives and parties.

I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&amp;P 500 with a high weighting, like Apple, can’t we end up in a situation where the individual company performance is irrelevant? Nobody will sell Apple because they just own it through their SP500 fund. As long as they are buying and holding the index fund, Apple remains at a high valuation. The only thing that differentiates individual stocks is active investors. And as they make up a smaller and smaller fraction of over investment, they become less relevant.