When Passive Becomes Active
Index funds were supposed to be neutral. They have become the most powerful force in corporate governance.
BlackRock, Vanguard, and State Street collectively own more than 20% of every company in the S&P 500. Calling them passive is a category error.
Jack Bogle’s vision was radical in its simplicity: instead of trying to beat the market, own the market. The index fund would be cheap, transparent, and democratic. Half a century later, passive investing has conquered the industry — and in doing so, has created a concentration of ownership that Bogle never anticipated and might not have welcomed.
Passive funds now control more than 50% of U.S. equity fund assets. The Big Three index managers — BlackRock, Vanguard, and State Street — collectively vote roughly 25% of the shares at every annual meeting of every major public company.
BlackRock, Vanguard, and State Street collectively own more than 20% of every company in the S&P 500. Calling them passive is a category error.
The Governance Paradox
Index funds cannot sell a stock they dislike — by definition, they must hold every constituent of the index. This means their only tool for influencing corporate behavior is the proxy vote. And they are using it with increasing assertiveness.
The Anti-Competition Concern
A more troubling question has emerged from academic research: when the same investors own all the competitors in an industry, do those companies compete less aggressively? The evidence is preliminary but suggestive — and the implications for antitrust policy are profound.