This post links to a terrific article in Barron’s profiling Jack Bogle (founder of Vanguard) and his long-term and often uphill battle to serve the average investor with a superior low-cost alternative to many of the investment solutions his firm has competed with since he launched the vanguard group more than 40 years ago. I am a huge fan of Bogle, and nothing that follows should suggest otherwise. But as anything gains in popularity it should be regularly scrutinized. I thought the article also did a great job concisely detailing the four challenges facing index investing today:
- The largest stocks in an index make up a disproportionate percentage of that index. As money flows into the index a disproportionate amount is allocated to the largest stocks. Consequently, these companies are at risk of having their share price bid up excessively regardless of whether or not performance suggests it should be.
- The number of indexes has ballooned and the composition of these indexes favors large companies: “there are more than 5,000 indexes and just 3,485 stocks — 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.”
- If the trend towards passive investing continues, a lack of private managers will increase the liklihood of mispricings in the marketplace and simultaneously reduce the markets capacity to act on these mispricings. “Even Bogle himself has said the likely result of everybody indexing is ‘chaos, chaos without limit.'”
- Three large players dominate the space: Vanguard, Blackrock and State Street. Together these three titans hold 88% of the companies comprising the S&P 500, and until only recently aligned themselves with management.
Follow the link below for a great read.