All about index funds: How BlackRock, Vanguard became passively powerful

Market beasts BlackRock, Vanguard and State Street now own about 20 per cent of all listed United States companies – the result of a boom in cheap, hands-off investment funds.

The world’s most popular exchange-traded funds (ETFs) track the US S&P 500 index, with the SPY, IVV and VOO funds holding more than US$1 trillion in aggregate.

“There’s a handful of giant companies that ... are dominating the fund industry in a way that they didn’t in the past,” Morningstar research vice-president John Rekenthaler told Markets with Madison.

His research showed the market share of passive funds, such as index funds and ETFs, officially overtook the share of actively managed funds in January.

Such funds have made investing easier and less risky than anyone in the mid-1990s could have imagined, even Rekenthaler himself.

“I thought maybe that equity passive funds might be, there might be 30 per cent market share ... And actually, that’s just about reverse now.”

Investors were being pulled into passive funds because of their lower cost, he said.

“These funds are very, very cheap. You could actually buy some index funds that have no management fee whatsoever.”

Despite the low costs, BlackRock and other passive fund providers were making billions from selling them.

“It’s not much of a margin but it’s a heck of a volume.”

He said their power had not distorted markets – yet.

“At some point, you cross a line when there aren’t enough active traders.”

He forecast passive investing would continue to grow.

“I hope it doesn’t continue to the point where problems actually do become obvious.”

Watch John Rekenthaler discuss how passive funds may change markets forever in today’s episode of Markets with Madison above.

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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

Madison Reidy is the host of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.