How Index Funds May Hurt the Economy

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The market clout of the indexers raises other questions too. The actual owners of the stocks--not the index-fund managers but the people putting money into index funds--have little say over the companies they own. Vanguard, Fidelity, and State Street, not Mom and Dad, vote in shareholder elections. As John Coates, the Harvard professor, notes: "For the most valuable public company in the world, three individuals can in principle swing the vote of 17 percent of its shares. Generally, a significant fraction of shareholders do not vote, even if in contested battles. As a result, the 17 percent actually represents more like 25 percent or more of the likely votes in contested votes. That share of the vote will generally be pivotal." In fact, the Big Three cast roughly 25 percent of the votes in S&P 500 companies.

Another worry is that these firms are too passive rather than too powerful. They are committed to being as lean and hands-off as possible, in order to reduce their fees. They do not tend to get involved in shareholder actions or small-bore corporate management, perhaps in part because any one company doing well against its peers is not of interest to the indexers, who want more assets under management and higher corporate profits.

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The effect on the real economy might look a lot like that of rising corporate concentration. And the two phenomena might be catalyzing one another, as index investing increases the number of mergers and makes them more lucrative.

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Just last month, Senator Elizabeth Warren grilled Treasury Secretary Janet Yellen on whether BlackRock, with its $9 trillion in assets under management, is too big to fail. The Federal Trade Commission is contemplating whether the big index-fund families pose antitrust concerns. Government watchdogs have raised alarm bells about the revolving door, as the Biden administration continues to draw officials from the Big Three. In an interview with The Wall Street Journal, the chief executive officer of State Street said he thought it was "almost inevitable, when you see this kind of concentration, that it probably will make sense to do something about it."