> On the other it’s accumulating more and more with a few firms giving them exceptional power.
Which firms are you referring to? Firms like Vanguard or firms like Apple?
I don't really see how Vanguard gets "power" here. They have no choices. They can't deviate from the index, so the money they control doesn't give them "power" to affect anything.
Or if you mean firms at the top of the index like Apple, they owe their power to their competitiveness and profit-making ability. I don't really see how inclusion in indexes inflates their power, except in an arguably slightly higher stock price. But it's not allowing them to engage in "powerful" behaviors they wouldn't otherwise. Apple isn't buying up companies it wouldn't if it weren't in index funds, for example.
> I don't really see how Vanguard gets "power" here. They have no choices.
They do have voting rights in companies that are part of the index. In my judgement, that's the more reasonable interpretation of the GP's point.
On the other hand, the more of the market held in index funds, the less is available to active investors to perform their valuation service, as described elsewhere in this discussion.[0]
Ah thanks, I hadn't thought about that aspect. That totally makes sense.
Is there any information on how Vanguard exercises this? Looking online it's hard to find any actual reporting on it.
It seems like Vanguard could either not participate in governance at all, participate in a kind of "neutral" fiduciary way designed to ensure accountability but without pissing off any segment of Vanguard investors, or could be more "activist" which is where it could abuse that power.
Is there some kind of US law that forces it to operate in a fiduciary way? Or isn't that just what's best for business anyways? I'm still wondering if there's any realistic opportunity for abuse of power here.
Vanguard do still have a lot of control by choosing their investments, because many of the people investing through them are buying blended funds rather than ones invested in a single index. For instance, if you look at funds like the LifeStrategy ones (which you'll commonly see recommended online by people), it's made up of lots of different funds:
So while they can't easily pick and choose which S&P 500 stocks they include in a fund like that, they can decide if the S&P 500 is 1% or 10% or 50% of what that fund invests in. And given the total amount of investments they have, if they decide to move towards or away from certain countries/indexes/etc that could have a significant impact.
Which firms are you referring to? Firms like Vanguard or firms like Apple?
I don't really see how Vanguard gets "power" here. They have no choices. They can't deviate from the index, so the money they control doesn't give them "power" to affect anything.
Or if you mean firms at the top of the index like Apple, they owe their power to their competitiveness and profit-making ability. I don't really see how inclusion in indexes inflates their power, except in an arguably slightly higher stock price. But it's not allowing them to engage in "powerful" behaviors they wouldn't otherwise. Apple isn't buying up companies it wouldn't if it weren't in index funds, for example.