BlackRock Jumps to the Defense of Index Investing

As the popularity of index investing has surged, so has commentary citing concern about its growth.

These concerns are often presented under attention-grabbing headlines:

• Are Index Funds Evil?
• Paul Singer Says Passive Investing Is ‘Devouring Capitalism’
• Are Index Funds Communist?

In its October ViewPoint, BlackRock, which manages the iShares ETFs, considers some of the questions being raised.

The concerns have two themes, it says. Some commentators have asked whether index funds — index mutual funds and exchange-traded funds — have the potential to distort investment flows, create stock price bubbles or, conversely, aggravate a decline in market prices.

Others have focused on index investing, stock ownership and competition, and ascribed higher consumer prices, escalating executive compensation and aspects of wealth inequality to index investment products — academics call this “common ownership”: ownership by a single entity of shares of multiple companies in an industry.

According to the BlackRock paper, overall asset allocation decisions of asset owners drive investment flows into different asset classes and sectors. Index funds are merely a vehicle for asset owners’ views; the funds themselves do not drive equity market prices or individual stock prices.

Absent index funds, it says, these asset allocations decisions would be executed through an alternative means, such as active funds or individual stocks.

Despite what headlines say, active strategies dominate both stock trading and information sources used in price discovery, according to BlackRock.

Index investing comprises only some 20% of global equities, with index funds and ETFs representing 7.4% of global equities.