STREET DOGS

Some comments from Barron’s on US index funds: Today, index funds account for 43% of all stock fund assets, and are expected to reach 50% in the next three years. In total, there’s almost $7-trillion in US funds that don’t have a manager actively evaluating its holdings.

The problem, critics say, is that index investors aren’t allocating capital properly. That’s because the biggest stocks make up the biggest percentage of most indexes. So new money going into index funds means that these already large stocks take in proportionately more money, getting more expensive, whether their business warrants a higher stock price or not.

Though there is now a riot of indexing — there are more than 5,000 indexes — the vast majority of money has poured into the S&P 500 and other large-company indexes, a trend that could starve capital from smaller companies.

The third problem: as active managers die off, the ability of the market to price publicly traded businesses diminishes.

Fourth: ownership is concentrated in three large firms: Vanguard, BlackRock and State Street together make up the largest shareholder of 88% of the companies in the S&P 500, and tended to vote with management, no matter how incompetent.

“The difference between traditional index funds and exchanged-traded index funds are like night and day,” Jack Bogle tells Barron’s. “ETFs are the way passive indexing morphs into active management and its attendant problems, including increased transaction costs and market timing. From 2005 to 2017 the average investor return from traditional index funds was 8.4%. For actively managed funds, it was 7.2%. For ETFs, it was 5.5%, even worse than actively managed funds.”