#265
THE FRANKENFUNDS
Published:
Dec 01, 2018
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John Bogle, the founder of Vanguard and inventor of the index fund (and, in essence, modern “passive” investing), is sounding the alarm on his own creation. Like Frankenstein, the index fund has taken on a life of its own that its creator never anticipated.
Index funds that track the market have grown at a tremendous pace – they represent over $6 trillion and own 35% of the U.S. stock market. The trend is unlikely to abate, and these funds may eventually represent 50% or more of outstanding corporate shares. In that scenario, the “big three” (Vanguard, BlackRock, and State Street) alone might own more than 30% of the vote.
The fear shared by Bogle and a number of academics is that a select group of individuals will control the voting power in America’s public companies. The increasing control of index funds is further magnified by the fact that most average retail investors don’t understand the voting process – nor are they typically compelled to vote their shares.
Bogle and others are calling for legislative measures to mitigate the risk – including enhanced fiduciary standards that would more explicitly restrict index funds to vote in the interest of their shareholders.
No matter how the problem is addressed, one thing is for sure – we will need to find a way to keep the FrankenFunds in check!
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