Index Funds Are Ruining the Stock Market by Concentrating Ownership

Index funds have become a dominant force in the stock market, but this concentration of ownership is having a profound impact on the market's dynamics. Over $20 trillion is invested in index funds, which is a staggering 30% of the US stock market's total value.

This concentration of ownership is leading to a lack of diversity in the market, with the largest 10% of companies accounting for 80% of the market's value. This creates a situation where a small group of investors has a disproportionate amount of control over the market.

As a result, the interests of these large investors are taking precedence over those of smaller investors and individual traders. This is leading to a market that is less responsive to changes in the economy and more vulnerable to market downturns.

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The concentration of ownership in the stock market is a pressing issue that's been gaining attention in recent years. It's astonishing to see how index funds have contributed to this trend.

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Passively managed funds have grown significantly, from 25% to 49% of all fund assets between 2010 and 2019. This shift has led to a concentration of ownership among a few large players.

The Big Three index-fund firms - BlackRock, Vanguard Group, and State Street - now control a substantial portion of the market. In fact, index funds control 17.2% of U.S.-listed companies, up from a mere 3.5% in 2000.

This concentration of ownership is not just limited to the number of companies controlled, but also the number of large common owners. Between 1995 and 2015, the proportion of companies with the same large common owners grew from 20% to 80%.

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The concentration of ownership in the stock market has grown significantly over the past 20 years, from 20% in 1995 to 80% in 2015.

This has led to a major problem, as large common owners have unprecedented control over companies, reducing the incentive for firms to compete and innovate.

Index funds, which offer low fees and high liquidity, have attracted investors and contributed to this concentration of ownership.

Even the late Jack Bogle, the creator of the first index fund, expressed concern about the high concentration of ownership in the market.

The Big Three index-fund firms - BlackRock, Vanguard, and State Street - could own as much as 30% of all U.S.-listed assets if index funds own half of the market.

This concentration of ownership gives these firms unprecedented power and control over the market.

Investors should be aware of the impact of passive ownership on market liquidity, as it has decreased market liquidity and increased bid-offer spreads.

The informativeness of stock prices has also decreased, making it harder for investors to make informed decisions.

The ability of active managers to add value has actually become more challenging due to the increased concentration of ownership and passive investing.

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