Results last week from BlackRock and Vanguard underscored the stranglehold the two US asset managers have over the $8tn exchange traded funds industry.
Investors ploughed $762.9bn into ETF investment products last year, a 34 per cent jump from 2019. Of this, more than half of the new business was mopped up by Vanguard ($210bn) and BlackRock ($185bn). State Street — the smallest of the Big Three index fund managers — attracted inflows of $40.2bn last year.
Together, the trio have an incredible $19tn in assets under management, roughly a tenth of the world’s quoted securities.
Passive funds, which make up the bulk of their holdings, have revolutionised investment. Their low cost and simplicity have made them a mainstay of retirement accounts and college funds. They have been great for investors. But the growing concentration of power is worrying.
The average combined stake in S&P 500 companies held by the Big Three has quadrupled over the past two decades, from 5.2 per cent in 1998 to 20.5 per cent in 2017, according to one Harvard study. Their actual sway is even bigger — accounting for about a quarter of proxy votes cast at S&P 500 companies — if you remember many stockholders don’t vote their shares. That percentage could increase to 40 per cent by 2040, the study predicted, turning the Big Three into the Giant Three.
Common ownership is one issue. Critics say the three have little incentive to promote competition in industries where they hold stakes in several big companies. Detractors claim index funds are “excessively deferential” to management, spending too little on supervision and relying heavily on proxy advisory firms for voting recommendations.
Vast size brings huge economies of scale for the ETF whales, allowing them to keep costs low. That discourages new entrants. Expect the trend to continue, particularly if State Street sells its funds business to another significant asset manager. Compared with Big Tech, the issues raised by Big Passive are so far too technical and low profile to spur regulatory action.
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