Wait, What? John Bogle Raises Passive Red Flags

401k, retirement, John Bogle, Vanguard, index funds, passive investing

Bogle and Tony Robbins on the 401(k) Specialist cover.

We can’t keep up. After banging the drum about their low fees and fiduciary favor, is industry conscience and investing elder statesman John Bogle having a change of heart about <squints> index funds?

The Vanguard founder took to the pages of The Wall Street Journal last week to ask a surprising, but important, question.

“There no longer can be any doubt that the creation of the first index mutual fund was the most successful innovation—especially for investors—in modern financial history,” Bogle writes. “The question we need to ask ourselves now is: What happens if it becomes too successful for its own good?”

Initially known as Bogle’s folly, the index fund idea was dismissed, with some going so far as to call it (and by extension him) “un-American.”

While it struggled to attract attention and investors, today total index fund assets are more than $6 trillion, with 70 percent of that invested in broad market index funds similar to his original Vanguard fund.

However, he warns that “If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation …These will be major issues in the coming era.”

Bogle notes that three index fund managers “dominate the field with a collective 81 percent share of index fund assets, names that shouldn’t surprise; Vanguard, BlackRock and State Street Global.

He then points to a number of solutions offered by academia, industry professionals and others to resolve this “concentration of corporate ownership,” some possible and some likely not. They include:

“It is time for public officials to consider the pros and cons of these issues with indexers, the financial community, academia, and active managers alike—and develop national policies that support high standards of corporate governance,” he concludes.

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