Elon Musk and Cathie Wood criticize passive index investing, saying it has gone too far

Ark Invest CEO and Chief Investment Officer Cathie Wood gestures as she speaks during the 2022 Bitcoin Conference at the Miami Beach Convention Center on April 7, 2022 in Miami, Florida.

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Elon Musk and Cathie Wood took aim at index funds in a Twitter thread, arguing that passive investments have controlled too large a percentage of the stock market.

The Tesla CEO responded to a post by venture capitalist Marc Andreessen, who said that giant asset managers like BlackRock have superior voting power in US companies because of their increasingly popular index funds. Musk agreed with Andreessen, saying that passive investing “has gone too far.”

“Decisions being made on behalf of real shareholders that are against their interests! Big problem with passive/index funds,” Musk tweeted.

Ark Invest’s Wood joined the conversation Wednesday, saying investors in index funds like the S&P 500 ETF missed out on Tesla’s 400-fold appreciation before it was added to the stock benchmark.

“In my view, history will view the accelerated shift to passive funds over the last 20 years as a massive misallocation of capital,” Wood added.

Wood has become one of the highest-profile active managers on Wall Street. Its flagship Ark Innovation ETF, with Tesla as its largest holding company, has suffered a brutal year so far amid rising rates, falling nearly 45%.

Passive investments such as index funds and exchange-traded funds have gobbled up about 60% of equity assets, stealing market share from active rivals, according to JPMorgan estimates. Money has flooded into passive products as investors have been attracted by their lower management fees during the height of bull markets. The index fund market has reached $6 trillion, while the ETF market has ballooned to $5 trillion since the inception of the SPDR S&P 500 in 1993.

In recent decades, index investing has also fared much better, with most active investors falling behind their benchmarks. In the 12 months through March, just 19% of active large-cap managers outperformed, according to data compiled by Savita Subramanian, director of US equity and quantitative strategy at BofA Securities.

Vanguard founder Jack Bogle, who devised the index fund in 1975 as a way for retail investors to compete with professionals, warned of the growing power of large passive fund managers and their control over voting shares. of the largest corporations in the United States. .

Bogle warned of “major issues” in the coming era in a 2018 Wall Street Journal op-ed just months before his death.

“If historical trends continue, a handful of giant institutional investors will one day control the votes of virtually every major American corporation,” Bogle wrote. “Public policy cannot ignore this growing dominance and consider its impact on financial markets, corporate governance and regulation.”

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