This podcast explores the potential harm of index funds on market competition and consumer prices. It discusses the concept of common ownership and its effects on industries. The dominance of mega-cap companies and concerns of anti-competitive behavior are also analyzed. The impact of index funds on tax avoidance and higher prices is explored. The long-term concerns of monopoly pricing power and the attractiveness of government bonds as investment options are discussed.
The increasing dominance of indexing through index funds may lead to less competition and higher prices in the market.
The negative effects of common ownership, such as reduced competition and increased tax avoidance, are still a topic of debate and the evidence is not conclusive.
Deep dives
The Rise of Index Funds and Criticism
Index funds have gained popularity due to their simplicity, low costs, and historical superior returns. However, critics argue that the increasing dominance of indexing may lead to less competition and higher prices in the market.
The Debate on Passive Investing's Impact
While some argue that passive investing could lead to an economy with less price discovery and lower competition, others believe that the scale of passive investing is not yet significant enough to cause major disruptions in the market.
Common Ownership and Competition
One concern raised is that when major passive investors, such as index funds, own significant stakes in multiple companies within the same sector, there may be reduced incentives for these companies to compete aggressively with each other.
Evidence and Counterarguments
Academic studies suggest possible negative effects of common ownership, such as higher prices, reduced competition, and increased tax avoidance. However, counterarguments state that evidence is fragile and that common ownership does not provide a plausible causal explanation for these effects. Regulators are monitoring the situation, but policy solutions remain unclear.
Over decades, index funds have delivered superior returns and surged in popularity. But some claim the rise of passive investing has come at the cost of less competitive markets and inflated prices for consumers. We look at the evidence that common stock ownership might harm economic efficiency.
And in today’s Dumb Question of the Week: How high would bond yields have to go for you to sell your stocks?
This podcast is for informational and entertainment purposes and is not financial advice. We do not provide recommendations or endorse any decision to buy, sell or hold any security. We cannot be held responsible for any actions listeners may take and investors are encouraged to seek independent financial advice.
Copyright 2023 Many Happy Returns
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