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Hidden Dangers of the Great Index Fund Takeover

bloomberg.com

11–20 of 96 posts

Re: Hidden Dangers of the Great Index Fund Takeover

#11
post #8
post #6

> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding. > She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An inve…

> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. This just isn't practical. What if I'm invested in Big Bank and Big Tech Co. but then Big Tech Co. creates a wallet app and credit card -- do I have to sell my ownership in one of these companies? As an investor I definitely want to own companies that compete because I don't know which one is going…

> do I have to sell my ownership in one of these companies?

No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company.

Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another.

> As an investor I definitely want to own companies that compete because I don't know which one is going to prevail.

That's the problem article describes! Such behavior reduces competition and hurts customers:

>> This line of research began with a 2014 paper about competition among U.S. airlines that quietly shook the fund industry and the antitrust world. José Azar, an economist at the University of Navarra in Barcelona, along with Martin Schmalz and Isabel Tecu, showed that airline ticket prices were 3% to 7% higher because big funds owned stakes in so many airlines.

Re: Hidden Dangers of the Great Index Fund Takeover

#12
I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&P 500 with a high weighting, like Apple, can’t we end up in a situation where the individual company performance is irrelevant? Nobody will sell Apple because they just own it through their SP500 fund. As long as they are buying and holding the index fund, Apple remains at a high valuation. The only thing that differentiates individual stocks is active investors. And as they make up a smaller and smaller fraction of over investment, they become less relevant.

Re: Hidden Dangers of the Great Index Fund Takeover

#13

I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&P 500 with a high weighting, like Apple, can’t we end up in a situation where the individual company performance is irrelevant? Nobody will sell Apple because they just own it through their SP500 fund. As long as they are buying and holding the index fund, Apple remains at a high valuation. The only thing that…

I guess inflation and interest rates play a non-negligible role there.

Re: Hidden Dangers of the Great Index Fund Takeover

#14
post #11
post #8

Earlier quoted context omitted.

> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. This just isn't practical. What if I'm invested in Big Bank and Big Tech Co. but then Big Tech Co. creates a wallet app and credit card -- do I have to sell my ownership in one of these companies? As an investor I definitely want to own companies that compete because I don't know which one is going…

> do I have to sell my ownership in one of these companies? No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another. > As an investor I definitely want to own companies that compete because I…

> No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company.

This just isn't practical though. Apple/Google/Amazon/etc would have to be broken up for example.

> That's the problem article describes! Such behavior reduces competition and hurts customers.

Hedging shouldn't be illegal though. Let me buy both cows and chickens -- even though I don't know which people will want to eat later.

Re: Hidden Dangers of the Great Index Fund Takeover

#15
post #6

> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding. > She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An inve…

No because that is essential for hedging, and hedging is good.

Re: Hidden Dangers of the Great Index Fund Takeover

#16
post #11
post #8

Earlier quoted context omitted.

> So the way we can solve this problem is to outlaw shares ownership of competing companies? Seems like a fair solution. This just isn't practical. What if I'm invested in Big Bank and Big Tech Co. but then Big Tech Co. creates a wallet app and credit card -- do I have to sell my ownership in one of these companies? As an investor I definitely want to own companies that compete because I don't know which one is going…

> do I have to sell my ownership in one of these companies? No, company would have to split itself (create separated business entity) so you would have to sell your competing part of the company. Such a change can also solve problem of companies using their dominant/monopolistic position in one business area to get unfair advantage in another. > As an investor I definitely want to own companies that compete because I…

Every company today is basically a tech company or transitioning into one. Does that mean you can now own only one stock?

Re: Hidden Dangers of the Great Index Fund Takeover

#17

I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&P 500 with a high weighting, like Apple, can’t we end up in a situation where the individual company performance is irrelevant? Nobody will sell Apple because they just own it through their SP500 fund. As long as they are buying and holding the index fund, Apple remains at a high valuation. The only thing that…

And as active investors become less relevant in the market, their returns will increase bringing the situation back into balance. Dumb money gets fleeced.

Re: Hidden Dangers of the Great Index Fund Takeover

#18
post #10

The extremely simple and correct solution here is to not let index funds themselves vote. Only allow the votes to be cast directly by the index share holders. Problem solved, I don't know why people keep hand wringing about this and not suggesting the supremely obvious solution here.

Solutions to complex problems are rarely simple or obvious.

Re: Hidden Dangers of the Great Index Fund Takeover

#19
post #6

> Index funds “are great for investors,” says Elhauge, “but part of the reason they’re great for investors is exactly because of the anti-competitive effects.” Elhauge says the trusts of the late 19th century that gave rise to today’s antitrust laws also involved a form of common shareholding. > She might want Coca-Cola to take big risks to crush Pepsi, and invest capital in new products and markets to do so. An inve…

No because that is essential for hedging, and hedging is good.

I absolutely agree. If you could only invest in one tech company, who would have invested in Apple/Amazon/Google instead of IBM? These are now large, successful companies that were able to succeed because investors were able to hedge and invest in an entire sector.

Re: Hidden Dangers of the Great Index Fund Takeover

#20

I think there’s a bigger issue with passive inversing. Once an equity is in a cap weighted index like the S&P 500 with a high weighting, like Apple, can’t we end up in a situation where the individual company performance is irrelevant? Nobody will sell Apple because they just own it through their SP500 fund. As long as they are buying and holding the index fund, Apple remains at a high valuation. The only thing that…

AAPL and similar stocks do show their share price changing in response to financial announcements, sales numbers, etc.

This concern is valid but I believe it only prevents price movement once a much larger majority of the market is passively managed.

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