The index fund recently celebrated its 50th birthday in July 1971, with its initial iteration starting with $6 million from Samsonite's pension plan. Shortly after, Rex Sinquefield and Dean LeBaron launched the first S&P 500 index funds. The growth of passive investing has been remarkable, now exceeding $16 trillion in index funds, which is almost double the combined size of the private equity, venture capital, and hedge fund industries. Including non-public internal passive strategies, this figure likely surpasses $25 trillion.
Despite its success, the rise of index funds has sparked concerns within the finance industry. As early as 1975, analysts warned that continued growth could distort capital allocation. In 1973, a mutual fund manager voiced concerns that index funds would replace high-paid portfolio managers with lower-paid computer clerks, dismissing the trend as "random-walk garbage." More recently, some financiers have argued that the growth of index investing has become a potential volatility-stirring disaster, though critics often overlook the dynamic nature of financial markets.
Passive investing is undeniably influencing market function due to its scale. However, the article questions whether it is "distorting" markets more perniciously than other investor types throughout history. A 2019 paper, "The Spectre of the Giant Three," estimated that BlackRock, Vanguard, and State Street collectively account for 25% of all S&P 500 shareholder votes, and this could rise to 40% within two decades. Harvard Law professor John Coates warned in 2018 that indexation could lead to an unprecedented concentration of economic control, with just 12 individuals potentially holding de facto power over most US companies.
