Does Passive Investing Distort the Market?

The New Yorker reports on concerns that the growth of index funds may distort the market. Since Jack Bogle introduced the first indexed mutual fund in 1975, their low fees and promise of delivering the market’s outperformance over other investment options over the long term has led to widespread adoption of the strategy. The article notes that “as many as twenty per cent of stocks are now owned by index funds,” and “when you factor in ‘closet indexing’ . . . the proportion of passive investors is higher still.” From 2000 to 2014, the amount of money in index funds […]

“Superstocks” Give Investors a Reason to Invest in Index Funds

A Wall Street Journal blog post by Jason Zweig profiles “superstocks” and suggests they provide a “reason why, for most people, index funds make superior sense.” Zweig notes that 44 U.S. stocks have generated cumulative returns of 10,000% or more over the last 30 years, and borrows the term “superstock” from William Bernstein of Efficient Frontier Advisors to describe stocks that grew at least twice the rate of the S&P 500. David Salem of Windhorse Capital Management says of the companies, “they have all undergone at least one near-death experience.” Apple, Inc., for example, fell 79.6% between 1992 and 1997, […]

Ackman’s Argues the Ill Effect of Index Funds on the Market

Barron’s reports on Pershing Square Capital manager Bill Ackman’s latest letter to shareholders, in which he sharply criticizes index funds. Ackman suggests that index funds are making the U.S like Japan, where the “system of cross-corporate ownership, the keiretsu, has been blamed for decades of Japanese corporate underperformance and market malaise.” He writes that “at current rates of inflows, it will not be long before index funds effectively control Corporate America and the corporations of many foreign countries,” which would create outcomes similar to Japan “without the counterbalancing force of large active investors and improvements in the governance oversight implemented […]