The Index Fund Empire: How Passive Investing Concentrated Corporate Power

The democratisation of investing produced one of the most concentrated structures of corporate power in modern capitalism. The index fund was sold, accurately, as a tool of dispersal: it let ordinary savers own a sliver of every public company for a fraction of a percent in annual fees, displacing the expensive stock-picker who rarely beat the market. Tens of millions of retirement accounts flowed into low-cost vehicles that simply tracked a benchmark. Yet the mechanical logic of that arrangement routed those tens of millions of dispersed claims through a tiny number of intermediaries. The end investor owns the economic exposure; a handful of firms own the votes, the relationships, and the rules that decide which companies belong in the benchmark at all. Power did not disappear when it left the active manager. It migrated, quietly, to a layer most savers have never heard of.

The Mechanics of Migration

The crossover is structural rather than speculative. Assets in low-cost index strategies have grown from roughly a third of US equity fund assets a decade ago to a clear majority, somewhere around 57 percent, and the share continues to climb. A saver buying a target-date fund or a workplace default option is, in the overwhelming majority of cases, buying an index product without ever choosing one. The default contribution, not the deliberate trade, is now the dominant way capital enters the market.

The reason this concentrates power is the plain arithmetic of scale. A passive fund competes almost entirely on cost, and cost falls with size. The result is a winner-take-most dynamic. Three firms, BlackRock, Vanguard and State Street Global Advisors, between them manage well over $30 trillion and capture roughly three-quarters of the US equity exchange-traded fund market. BlackRock alone runs in the region of $14 trillion in assets under management, with Vanguard close behind near $12 trillion and State Street’s asset-management arm holding several trillion more. These are sums larger than the annual output of most national economies, assembled not through bold bets but through the patient accretion of fractions of a percent.

The crucial point is that the saver delegated the asset allocation, not the ownership rights. When money enters an S&P 500 index fund, the fund buys the shares and, with them, the voting rights attached. The investor receives the return; the manager receives the franchise.

The Universal Owner Paradox

A passive manager cannot sell. That is the defining constraint, and it inverts the traditional discipline of the market. An active investor who dislikes a board can exit, and the threat of exit is itself a form of governance. An index fund tracking the S&P 500 must hold every constituent in proportion, regardless of management quality, for as long as the company remains in the benchmark. It cannot vote with its feet. It can only vote with its proxy.

This produces the universal owner. The three largest passive managers collectively constitute the single biggest shareholder in the great majority of S&P 500 companies, on the order of nine in ten, and together typically hold roughly a fifth to a quarter of the shares in a given large American corporation. No cartel of activist raiders ever assembled stakes of that size across the whole economy. They acquired them by accident of inflows, one default contribution at a time.

The paradox is that this position generates enormous influence and almost no incentive to exercise it carefully. Stewardship is a cost centre. A firm earning only a few basis points on an index fund cannot afford to staff a research-grade governance team for every one of thousands of holdings; the economics forbid the deep, company-specific engagement that justified the fees of the active managers they replaced. The owner of everything has a structurally weak reason to scrutinise anything in particular. Power and attention have come apart.

Common Ownership and the Competition Question

If the same three shareholders sit atop Coca-Cola and PepsiCo, United and Delta, JPMorgan and Citigroup, a natural question follows: what is their interest in those firms competing hard against one another? An owner of the whole industry profits from the industry’s aggregate margin, not from any single firm’s market-share gains at a rival’s expense. This is the common ownership hypothesis, and it has moved from the academic fringe to the centre of antitrust debate.

The empirical case is contested and should be treated with caution. Influential studies linking common ownership to higher airline fares and banking fees have been challenged on methodology, and no consensus exists that diversified index owners actively engineer softer competition. The mechanism by which a passive fund would even transmit such a preference, given its thin engagement budget, remains unclear.

What is not in dispute is the structural fact that creates the worry. For the first time since the trust-busting era, a concentrated set of owners holds significant simultaneous stakes across nearly every competitor in nearly every industry. Whether or not they exploit it, the configuration alone is a standing question for any regulator who takes the architecture of markets seriously, because the antitrust framework was built to police firms that collude, not to address a shareholder base they happen to share.

The Index Architects

Beneath the asset managers sits a quieter and arguably more consequential layer: the firms that define the benchmarks themselves. When a manager promises to track the S&P 500 or the MSCI World, it outsources the single most important decision in passive investing, what to own, to a private company that draws up the index. That decision is made by an oligopoly. A handful of providers, led by S&P Dow Jones Indices and including MSCI, FTSE Russell, CRSP and Nasdaq, account for the overwhelming majority of the US equity ETF market, a level of concentration that comfortably clears the threshold antitrust authorities treat as highly concentrated. S&P Dow Jones benchmarks alone underpin roughly half of all ETF assets.

Inclusion in a major index is no longer a passive measurement of market reality; it is an act of allocation. Because trillions of dollars must mechanically buy whatever enters a benchmark, the providers’ rulebook becomes a gatekeeping power over capital itself. When the major providers moved to restrict or exclude companies with multiple classes of shares, requiring a minimum of public voting power as a condition of inclusion, they were not describing the market. They were setting a governance standard and enforcing it with the threat of capital denial, a sanction no regulator handed them and no electorate approved.

The power also extends to whole nations. A provider’s decision to add or reweight a country in an emerging-markets index can redirect tens of billions of dollars across borders, making the index committee a force in global capital flows that rivals many finance ministries. The architect of the map shapes the territory.

The Proxy Machinery

One layer remains, and it is the least visible of all. A universal owner with thousands of holdings and a thin stewardship budget cannot research every ballot item at every annual meeting. It buys the recommendations, and frequently the votes themselves, from proxy advisers. Two firms, Institutional Shareholder Services and Glass Lewis, between them account for upward of nine-tenths of the US proxy advisory market.

Through automated voting services, many institutions cast ballots in line with these advisers as a default. The practical consequence is that two private firms can swing a meaningful share of the shareholder vote on a given proposal across the corporate landscape. Standards drafted in two voting-guideline documents propagate, through the index managers’ delegated votes, into the boardrooms of thousands of companies at once. This has drawn sustained scrutiny from legislators, state attorneys general and competition authorities, precisely because so much governance influence flows through so narrow a channel with so little accountability.

The Strategic Implication

The deepest shift here is one of substance disguised as a shift of style. Capitalism’s governing premise was that the price mechanism allocates capital: investors who picked well were rewarded, the badly run were starved of funds, and the discipline of buying and selling kept managers honest. Passive investing weakens that mechanism at its root. Capital now flows by formula into whatever the index defines, the discipline of exit is gone, and the residual levers of ownership, the vote and the rulebook, have pooled in the hands of perhaps a dozen institutions across asset management, indexing and proxy advice.

None of this resulted from conspiracy. It is the emergent property of millions of rational, fee-minimising decisions by ordinary savers, which is precisely what makes it durable and difficult to reverse. No single actor designed the concentration, so no single actor can easily undo it. The serious question is not whether these institutions abuse their position, but whether a system in which ownership has been so thoroughly separated from judgement can keep allocating capital, and disciplining the powerful, as efficiently as the one it replaced.

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