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I wonder how many people believe the statement in the article: "[index funds] own[] essentially all the stocks or bonds in a market basket all the time."
Index funds tracking indexes that are limited to large, liquid securities do tend to use full replication. But even funds with massive AUMs like VTSMX use sampling to deal with smaller issues. Then there are commodity index funds that use derivatives, currency hedged index funds, enhanced index funds, etc.
Vanguard: "[We] vote to the sole benefit of our mutual-fund shareholders."
For those who think that Vanguard should not be "hugging trees" but should be paying attention to basic dollars and cents, there's Vanguard's voting record on compensation:
Ultimately, though, I feel that the problem in holding corporate management accountable is not limited to index funds. Fund management companies either care about how companies are run or they don't. If they do, they'll act accordingly regardless of how they own stocks in companies (actively or passively).
Market pricing is another question. There, ISTM that Bogle is right - until index funds own virtually the whole market, it's not a problem. Index funds may be somewhat like market orders in that they must accept whatever's out there. But limit orders would still control pricing. So long as there were enough limit orders that the "collective wisdom of the marketplace" could come through, the actual percentage of index ownership wouldn't matter.
From the article: "Index funds don’t set prices; they only accept the prices that active investors have already set." Is this true? Doesn't it assume that index mutual fund and ETF investors are as robotic and passive as the funds themselves? But that is not true. If for instance Apple has a good or bad earnings report index fund investors--financial advisers, pension plans and retail investors--are going to react to that, buying or selling more shares of the index funds. Yes, index funds are passively run, but that isn't necessarily the case at all for the investors in index funds who adjust their exposure to index funds based on macro and micro-economic information. And considering that the largest 100 companies account for 45% of the entire market cap of all stocks in the U.S., it isn't so hard for index fund investors to react to new information regarding those specific companies. So I think it is quite possible for fund shareholders to set prices at those companies.
AAPL is a good chunk (12-15%) of technology index funds like IYW, XLK, FTEC, VITAX. But I don't think the concern is one of sector funds taking over the market. In broad based indexes like the S&P 500, AAPL represents about 3%. Would people sell an investment that they were 97% happy with just because they didn't like how the other 3% was being run? I'm more skeptical of that than you are.
But for the sake of argument, let's grant that people would bail on the S&P 500. Then all 500 CEOs would be punished for the sins of one. This may move prices of the whole market, but it's not an effective way of holding AAPL's management accountable - hitting a gnat (albeit a large one) with a sledge hammer.
Going off on a slight tangent - I agree that some index funds are not robotic market participants. Some funds have the flexibility to buy and sell when prices are more to their advantage, as opposed to trading instantly when an index reconstitutes. To that small extent they can act to stabilize prices. This still doesn't help send a message to management, but it can move prices (a little).
Comments
Index funds tracking indexes that are limited to large, liquid securities do tend to use full replication. But even funds with massive AUMs like VTSMX use sampling to deal with smaller issues. Then there are commodity index funds that use derivatives, currency hedged index funds, enhanced index funds, etc.
Vanguard: "[We] vote to the sole benefit of our mutual-fund shareholders."
Been there, done that.
http://mutualfundobserver.com/discuss/discussion/28910/lewis-braham-vanguard-s-climate-change-dismissal
For those who think that Vanguard should not be "hugging trees" but should be paying attention to basic dollars and cents, there's Vanguard's voting record on compensation:
- Vanguard supporting CEO compensation plans in 97% of votes (Bloomberg, 2016)
http://www.bloomberg.com/news/articles/2016-02-17/vanguard-blackrock-seen-seldom-challenging-companies-on-ceo-pay (97% of votes for CEO pay - 2016 report)
- Vanguard tops list of excessive CEO pay enablers (AFSCME study, 2011)
Ultimately, though, I feel that the problem in holding corporate management accountable is not limited to index funds. Fund management companies either care about how companies are run or they don't. If they do, they'll act accordingly regardless of how they own stocks in companies (actively or passively).
Market pricing is another question. There, ISTM that Bogle is right - until index funds own virtually the whole market, it's not a problem. Index funds may be somewhat like market orders in that they must accept whatever's out there. But limit orders would still control pricing. So long as there were enough limit orders that the "collective wisdom of the marketplace" could come through, the actual percentage of index ownership wouldn't matter.
But for the sake of argument, let's grant that people would bail on the S&P 500. Then all 500 CEOs would be punished for the sins of one. This may move prices of the whole market, but it's not an effective way of holding AAPL's management accountable - hitting a gnat (albeit a large one
Going off on a slight tangent - I agree that some index funds are not robotic market participants. Some funds have the flexibility to buy and sell when prices are more to their advantage, as opposed to trading instantly when an index reconstitutes. To that small extent they can act to stabilize prices. This still doesn't help send a message to management, but it can move prices (a little).