The entire system just helps big companies become even bigger and even more anti competitive. Even just due to their existence (being large and existing). Passive investing is good for the general person but also makes this concentration worse and keeps capital away from smaller companies. We need some way to make the small and medium portions of the economy work better.
The history of corporations shows that monopoly or oligopoly is the end result without intervention. And even with intervention scale matters.
Example: in smaller countries there are multiple cellphone providers that are essentially identical. They don't compete, really.
When a business starts harvesting the economies of scale it also becomes easier to compete against everyone. Then you get the political externalities (nobody gets fired for buying IBM) and real anti-competitive behavior (supplier exclusivity, bribes, tying, discounts, etc).
Rogers, Bell, and Telus are the three companies that own or acquire nearly every internet/mobile/tv property in the entire country. They all offer the exact same plans at the exact same prices, moving in lockstep almost down to the hour when new price or benefit surfaces.
Similarly banking is dominated by the big 5 who don’t really compete as far as the average customer is concerned.
In many regions groceries are dominated by two companies, while nationally the entire market basically consists of five or so.
And because Canadian pension plans and ETFs are so heavily invested in these select few companies, they trudge along with virtually no incentive to upset the status quo because the government finds it easier to oversee oligopolies than allow competition to benefit the populace.
The history of technology focused companies shows that monopolies never last. Eventually the monopolist always misses a disruptive innovation and a startup competitor eats their lunch. No one cares now that IBM used to have a (near) monopoly on mainframes.
Some other slower moving industries are more conducive to lasting monopolies.
I like to think of it from the point of network effects. So from the point that if your business makes more money by more connections then you can see how this explodes into a natural monopoly. Be that by something like operating costs are cheaper per connection via more efficient routing or more direct in just simply $/connection. It's definitely a (very) naive model but I think it can be useful and at least helps understand how there is such a thing as a "natural monopoly".
It also applies to the classic Silicon Valley model. You operate at a loss in the beginning because you are hyper focused on growing nodes and connections. Once you have sufficient size your whole business structure changes, being able to leverage the network effects (including your competitor's now lack of network). A good example of a network effect is social media. No one joins a platform because no one is there. No one leaves a platform, even if they hate it, because everyone is there. In a world where we've made scale so critical, natural monopolies are going to proliferate.
Passive investing doesn't keep capital away from smaller companies. When Nvidia stock rises the company doesn't get that money. If they need more capital then they'll have to issue a secondary offering.
Mutual funds don't generally make pre-IPO investments regardless of whether those funds are actively or passively managed.
> The entire system just helps big companies become even bigger and even more anti competitive. Even just due to their existence (being large and existing). Passive investing is good for the general person but also makes this concentration worse and keeps capital away from smaller companies.
No. There's still plenty of active money doing price discovery; you can't attribute this market concentration to the rise of passive. (And this is self-correcting; as the share of active money shrinks, the reward to active investors for price discovery grows.)
The market is concentrated because that's where active money thinks the future profit is.
Or is the active money also in the big companies, because even though there are good opportunities elsewhere, the steady ETF flows just keep pumping the big companies even faster?
There is a ton of money being siphoned off with zero place to put it. When sv collapsed why does Roku park half a billion dollars in a bank account. Roku has 8th of Mazda’s net worth parked in a bank account… there is unchecked capitalization for the sake of the share price, this money is doing nothing except buying up competition.
Size is also a disadvantage in a market, growing by 2% when you are a $1M company is easy, growing by 2% when you are a $100B company is hard. Corporate managers have an embedded growth obligation to maintain both their position and the company's position. This is part of the reason they are vulnerable to new market entrants.
> Do you want a dysfunctional soviet central party planning committee?
I did not write the parent of your comment but I went back to re-read it and I didn't see any hints of central planning. In fact, the parent proposed no solution, it only pointed out a process of continued monopolization which, if unchecked, would lead to something resembling the monopoly of the late Soviet central committee over their economy.
In a sense, your comment inverted the meaning of the parent.
Nah pensions were always a horrible thing that ruined so many lives. No one's retirement should be bound to the long term success of the company they happened to work for.
Defined benefit pensions are also invested in the market. It would be better to have Social Security with higher income limits, and with regular adjustments to contributions and retirement ages to ensure that the system is in balance. And something like IRA on top of that. Then you would have two different systems with different failure modes.
Why do you think the defined benefit fund managers are better than the collective market for preventing concentration?
Also, what about the increased risk of corruption leading to underfunded DB pensions? Which is apparently near certain, given that pretty much every defined benefit pension fund across the US is underfunded.
It wasn’t. Most people aren’t market experts so handing them the keys wasn’t a great idea. They should’ve just cracked down on pensions and made them more responsible (which they did after 401(k) creation).
Defined benefit plans are the same thing with misaligned incentives and more middlemen taking a cut.
Defined contribution plans didn’t spring out of the ether on their own. They were a reaction to evident rampant risks and deficiencies of defined benefit plans even after many failed attempts at reducing that risk via regulation.
You want to slow this stuff down? We now have the tech for the Fed, the central bank, to give everyone a bank account directly. It is 100% secure because it is issued by the central bank and it has a number of amazing benefits:
1. You earn interest at the Fed’s rate. So basically why would you keep your money with Chase earning 0.25% maybe when you can earn easily 10x that. So everyone pretty much moves to this new system.
2. This eliminated speculation. The banks can no longer turn $1 into $30 by repeatedly borrowing and lending. But it is important to slowly grow the money supply. So the Fed can just no questions asked deposit a predefined sum of money every month into everyone’s account.
3. Your transactions are free and guaranteed.
But of course this would cut out a whole lot of banks and other financial institutions out of the loop and so it will never happen.
No it's not. Actively managed funds will in most cases not beat an index fund. Investorers have learned this and has chosen passive funds. This together with more people investing in funds has increased the size of passive ETFs in the market.
Usually those active managers stay in business by saying they get "superior risk-adjusted returns" even though they didn't outright get better returns.
This is, of course, changing the goal post because a portfolio with 90% S&P 500 and 10% cash will also appear "superior risk-adjusted" than 100% S&P 500. Sharpe ratio is the most misunderstood metric invented by humanity.
US companies have great reporting. Every quarter you get a nice report with GAAP numbers. In Europe, for example, reporting is less frequent and murkier. Reports often don't even include standardized net earnings.
Top US companies like Microsoft, Google, Apple, Nvidia, Tesla, Meta, all have intelligent, driven, forward looking CEOs. Most other companies have CEOs asleep at the wheel. Can anyone name a smaller public company or a public company outside the US with a highly driven, forward looking CEO?
ETFs are really just mutual funds with better liquidity and more opportunity to trade. I don’t think it should be shocking that they hold so many assets since mutual funds hold an enormous number of assets as well.
This is related to the somewhat troubling fact that globally, shares held exceed shares issued by about 50%. (And before you flee to gold, gold held exceeds gold in existence by about 100%.)
“I want ETFs and low fees” -> https://www.bogleheads.org, there are various articles describing which funds to pick. (I’m thinking by “indexing service” you mean index fund?) Bogle was the founder of Vanguard and argued that low fees were better than active management; the “bogleheads” are the community that follow that advice.
Or you just buy the largest stock in each one of the 7 largest sectors and it pretty much correlates to the sp500. ETF have some nasty hidden fees related to the etf price being more expensive than the basket when you buy and less than the basket when you sell.
Sector
Company 1
Company 2
Information Technology
Microsoft (MSFT)
Apple (AAPL)
Financials
JPMorgan Chase (JPM)
Berkshire Hathaway (BRK.B)
Health Care
Johnson & Johnson (JNJ)
UnitedHealth Group (UNH)
Consumer Discretionary
Amazon (AMZN)
Tesla (TSLA)
Communication Services
Alphabet (GOOGL)
Meta (META)
Industrials
Boeing (BA)
Caterpillar (CAT)
Energy
ExxonMobil (XOM)
Chevron (CVX)
I'm sure I'm missing something but does direct indexing really solve anything for you in this instance?
If you're in any of the main ETFs or index funds you're getting really cheap access to what's basically the same list of stocks you'd get with direct indexing. If you're trying to get equal-weighting of an index there's ETFs for that too, but that would mean you're betting more on companies without the ability to benefit from significant hegemony and the madding crowd of index fund influx, which seems to be where most of the growth comes from these days.
Readit News
Example: in smaller countries there are multiple cellphone providers that are essentially identical. They don't compete, really.
When a business starts harvesting the economies of scale it also becomes easier to compete against everyone. Then you get the political externalities (nobody gets fired for buying IBM) and real anti-competitive behavior (supplier exclusivity, bribes, tying, discounts, etc).
It's practically a natural law.
Rogers, Bell, and Telus are the three companies that own or acquire nearly every internet/mobile/tv property in the entire country. They all offer the exact same plans at the exact same prices, moving in lockstep almost down to the hour when new price or benefit surfaces.
Similarly banking is dominated by the big 5 who don’t really compete as far as the average customer is concerned.
In many regions groceries are dominated by two companies, while nationally the entire market basically consists of five or so.
And because Canadian pension plans and ETFs are so heavily invested in these select few companies, they trudge along with virtually no incentive to upset the status quo because the government finds it easier to oversee oligopolies than allow competition to benefit the populace.
Some other slower moving industries are more conducive to lasting monopolies.
It also applies to the classic Silicon Valley model. You operate at a loss in the beginning because you are hyper focused on growing nodes and connections. Once you have sufficient size your whole business structure changes, being able to leverage the network effects (including your competitor's now lack of network). A good example of a network effect is social media. No one joins a platform because no one is there. No one leaves a platform, even if they hate it, because everyone is there. In a world where we've made scale so critical, natural monopolies are going to proliferate.
Mutual funds don't generally make pre-IPO investments regardless of whether those funds are actively or passively managed.
No. There's still plenty of active money doing price discovery; you can't attribute this market concentration to the rise of passive. (And this is self-correcting; as the share of active money shrinks, the reward to active investors for price discovery grows.)
The market is concentrated because that's where active money thinks the future profit is.
The pension reallocations? Blackrock? Bitcoin?
There is a ton of money being siphoned off with zero place to put it. When sv collapsed why does Roku park half a billion dollars in a bank account. Roku has 8th of Mazda’s net worth parked in a bank account… there is unchecked capitalization for the sake of the share price, this money is doing nothing except buying up competition.
Because this is how you get a late Soviet central committee.
I did not write the parent of your comment but I went back to re-read it and I didn't see any hints of central planning. In fact, the parent proposed no solution, it only pointed out a process of continued monopolization which, if unchecked, would lead to something resembling the monopoly of the late Soviet central committee over their economy.
In a sense, your comment inverted the meaning of the parent.
Also, what about the increased risk of corruption leading to underfunded DB pensions? Which is apparently near certain, given that pretty much every defined benefit pension fund across the US is underfunded.
Defined contribution plans didn’t spring out of the ether on their own. They were a reaction to evident rampant risks and deficiencies of defined benefit plans even after many failed attempts at reducing that risk via regulation.
/s
1. You earn interest at the Fed’s rate. So basically why would you keep your money with Chase earning 0.25% maybe when you can earn easily 10x that. So everyone pretty much moves to this new system.
2. This eliminated speculation. The banks can no longer turn $1 into $30 by repeatedly borrowing and lending. But it is important to slowly grow the money supply. So the Fed can just no questions asked deposit a predefined sum of money every month into everyone’s account.
3. Your transactions are free and guaranteed.
But of course this would cut out a whole lot of banks and other financial institutions out of the loop and so it will never happen.
And the odds of picking the right managed etf over index fund?
This is, of course, changing the goal post because a portfolio with 90% S&P 500 and 10% cash will also appear "superior risk-adjusted" than 100% S&P 500. Sharpe ratio is the most misunderstood metric invented by humanity.
Deleted Comment
US companies have great reporting. Every quarter you get a nice report with GAAP numbers. In Europe, for example, reporting is less frequent and murkier. Reports often don't even include standardized net earnings.
Top US companies like Microsoft, Google, Apple, Nvidia, Tesla, Meta, all have intelligent, driven, forward looking CEOs. Most other companies have CEOs asleep at the wheel. Can anyone name a smaller public company or a public company outside the US with a highly driven, forward looking CEO?
Deleted Comment
Sector Company 1 Company 2 Information Technology Microsoft (MSFT) Apple (AAPL) Financials JPMorgan Chase (JPM) Berkshire Hathaway (BRK.B) Health Care Johnson & Johnson (JNJ) UnitedHealth Group (UNH) Consumer Discretionary Amazon (AMZN) Tesla (TSLA) Communication Services Alphabet (GOOGL) Meta (META) Industrials Boeing (BA) Caterpillar (CAT) Energy ExxonMobil (XOM) Chevron (CVX)
If you're in any of the main ETFs or index funds you're getting really cheap access to what's basically the same list of stocks you'd get with direct indexing. If you're trying to get equal-weighting of an index there's ETFs for that too, but that would mean you're betting more on companies without the ability to benefit from significant hegemony and the madding crowd of index fund influx, which seems to be where most of the growth comes from these days.
Deleted Comment